The trend for business loans and personal loans is on the rise these days. Due to this, business owners have shown interest in getting access to quick cash to meet their short-term or long-term financial needs.
These loans are appealing for many reasons, one being they offer fast cash when you need it the most and don’t have any money available in your bank account.
Banking institutions often stay very cautious, and that is a good thing. In order to obtain a business loan, you will have to apply formally in a bank either digitally or physically. You must do proper research ahead of time to get the most reasonable interest rate on your loan.
Any banks or financial institutions are very likely to ask several questions and documents from you to check your repaying capacity. These lending institutions also run through this process to check if they can trust their clients or not. This article will focus primarily on those questions asked by banks before releasing a personal or business loan.
Here are the ten things banks will want to know before approving your business loan.
1. Personal Credit Score
The first thing most lending institutions will look at when deciding whether or not to lend you money for your business is your credit score. Personal credit scores are commonly applied in this case, especially since the business owner happens to be applying for a loan.
Banks will take into account one’s personal financial history as a way of determining our trustworthiness and responsiveness about paying back debts on time.
So, it becomes significant for a person owning a business to maintain a good credit score to get faster approvals and lower interest rates on your business loan.
Banks often ask for security when you apply for a business loan online or in person. The process of requesting security is done to ensure the risk is reduced on their part for giving loans to new businesses that have not fully proven themselves.
Businesses with lower visibility or experience on the market are more susceptible to trading losses. So to counter this, banks ask for collateral which can be something like gold and property or something else they may deem valuable. Those assets could easily cover your loan for the bank if you cannot repay it on time.
3. Business Plan
Banks also often ask to see your business plan before giving a hefty business loan. Banks see their customers’ business models as they are; if they spot flaws that might lead to poor performance, they will have a reason to reject the loan.
Generally, financial institutions want to know more about how you will distribute your funds once given or invested, the competitive advantage that your company holds over others in its targeted market, and what direction it is moving towards in the future.
4. Purpose of Availing Loan
Most banks are skeptical about approving business loans with a large amount because they fear the loan may turn into a bad loan. Thus, banks ask you what you intend to do with all the issued loan amount. In this way, banks understand how you will use the funds, allowing them to decide whether to approve you or not.
5. Business Financial Reports
Banks often ask this question, and it can be rather challenging to answer. If your business has been in operation for at least a year, then the bank will expect to see financial reports like a balance sheet, income tax return, and other financial documents. The requirements may be different in every other bank as lending policies are not universal.
But, if you are a start-up with no financial reports and are just starting. Banks are likely to request collateral or a guarantor before they grant your business loan.
6. Licenses & Permits for Your Business
This is a fundamental area that will be investigated by any lending institution providing a business loan. Additionally, it is a crucial step on their part to ensure the legality of your business’ operation.
To ensure the government recognizes your business, a bank may ask for a trade license, registration certificate, or GST. To minimize any risk, banks take this type of action.
7. Insurance Documents
A bank will want to be fully secured before lending any amount to a business, which is a good thing. In this case, they ask for business owners’ insurance to cover the business loans if anything unexpected happens, such as the death or disability of any founders. By doing so, banks can have the chance to retrieve their loan back from the insurance company.
8. Past Records
An existing business with positive sales or growth over the past years has a better chance of getting approved for a business loan. These include tax returns, growth reports, net profit accumulated in a financial year, etc. If you own a business that has been in operation for at least one year, you need to be prepared with those documents.
9. Ownership and Association with Other Businesses
In some cases, banks may also require you to disclose all of your businesses and other partnerships. The chances of your business loan being approved automatically increase if you own or are affiliated with another successful business.
10. The Size of the Loan
If you apply for a loan of over ten lacs for a small-scale business, the bank will likely reject your application. The market and the financial requirements need to be thoroughly studied ahead of time. As a result, you should always prepare to argue for a fair amount against your business’s scalability if you want your business loan to be approved.
You must have now gotten a brief idea concerning the files and documents that banks usually accept when deciding on your business loan application. The next time you are in line to fill out a business loan online or in person, it will be much easier if you are prepared to follow the proper protocols.
It will allow you to be better prepared to get the amount of money you desire at a fair interest rate and within a decent time frame, thus giving you more success with business endeavors.