Applying for a business loan: It’s important to understand the process

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Shortlist a few banks or NBFCs that you may want to approach and like a bank carries out its due diligence, you should keep a close watch on what is offered to you in terms of a loan

Applying for a business loan is not the same as applying for an individual loan. The requirements are more stringent and the paperwork greater. Hence, it is important to understand the process and the steps involved.

The reason for the loan
The first bit is to understand why you need the money and the loan. Business needs can be different, which means the loan requirement would be different. The reason will also mean you would be able to quantify the amount of money you need and different products available in the market. For example, if the loan is required to buy machinery, there are a number of banks and NBFCs that provide equipment and machinery loan and equipment finance. Therefore, knowing the need for the loan is sometimes vital.

Books of account
One of the most vital components behind any bank loan is to have your finances in order. This is especially true today when banks have tightened their lending criteria and are very particular about whom they extend a loan to. Keeping proper books of accounts is very important and before applying for a loan, it is vital that you go through them to weed out any discrepancies or errors. Banks generally ask for the balance sheet of the company, profit and loss accounts, cash flow statement, tax audit reports and statutory audit report. These have to be for the last 3 years in audited/provisional financials. You will also need one year Income Tax returns of your company.

Get your answers ready
Beyond the financial statements, you would also need to get some more documents and answers to questions that the bank may pose to you. Current year performance and projected turnover on letterhead of the entity would be required and it is important to get this right. If, for example, the loan is to execute a specific project, you would need to provide a detailed project report containing details of the project, cost involved, ways to finance it, and projections. In some cases you may need to provide government approvals for power, pollution, fire and safety, building plans along with documentary proofs. If you are buying a machinery or any other asset, you would need to submit, and where it is the case of purchasing a piece of land, it can be the copy of allotment letter/conveyance deed in case of land. The answers and the supporting document you would need would vary according to need of the loan and it would be prudent to get this part sorted.

Credit rating 
It is surprising that businesses often do not understand the value of getting a credit rating for their enterprise. A good credit rating can bring a substantial difference in the interest rate you are charged by a bank and can in fact be deciding factor in getting your loan approved. A credit rating is extensive in nature and looks beyond the financial bits of a business. Most ratings do a comprehensive risk analysis that look at financial strength, industry dynamics, competitive position of the entity, operating efficiency, management capability, organization systems, customer profile, track record with lenders and other stakeholders. Banks feel much more comfortable if your business has a credit rating and hence, before you go for a bank loan, you may want to get your business analyzed and rated.

Homework – It is very important to do some homework before you get on with the process. Different banks have different requirements and products. See what suits you the best and what may work out for you. Shortlist a few banks or NBFCs that you may want to approach and like a bank carries out its due diligence, you should keep a close watch on what is offered to you in terms of a loan. While we often only look at interest rates, there are many other aspects to consider before we decide which offer to take.