10 Things the Bank Will Ask before Providing a Business Loan
By Anupama Deshpande | May 01, 2018

Whether it is a new business or existing business, whether it is a small business or large business, all businesses need funds for their growth and to meet their expenses. Business units may require funds for various needs and different terms.

Majority of banks and NBFCs offer business loan to the businesses in India at very competitive interest rates and for various tenures as required by the borrowers.

Interested to know Education Loan Vs Personal Loan

If you are willing to apply for a business loan from a bank or NBFC, then keeping yourself ready with following 10 things would definitely help you in availing your business loan in a hassle-free manner.

You will have to be very clear about the purpose of availing Business Loan. There may be several purposes for which a business loan is taken such as business expansion, setting up a new business, expansion of working capital, purchase of equipments, etc. You should know in advance as to for which cause you require the business loan and about immediate application of such fund after receiving them.

This is also very important to mention that which type of business loan is needed as there may be various kinds of business loans like Cash Credit, Working Capital Loan, Intermediate Loan or Long Term Loan. You have to specify as to which among these is required by you. Based on his, loan interest rate and loan tenure will be decided.

You need to produce a detailed business plan to the lender before your business loan application is submitted. Business Plan is a roadmap of your business goals and your plans & strategies to achieve these goals. It is a written description of the future of your business. This document gives details about company, its products & services, market analysis, business operations, business strategies, etc. This document is very much required to decide the funding for your business. It is very important to present a high quality and well designed business plan covering all the points to achieve your business goals.

Interested to know How to get a Business Loan from a Bank?

Collateral is an asset pledged to a lender till a loan is not repaid. If the loan is unsecured then no collateral is required as a security against the loan but if it is a secured loan then the lender will ask for collateral against business loan. In case, the business loan is not repaid in time then the lender has the authority to sell the pledged asset to pay off the loan. Generally, lenders require collateral from small businesses as more risk is involved there. Various assets like real estate, equipments, stocks, debentures, etc. can be used as collateral.

Lenders are interested to get the information about many financial ratios such as revenue, operating profit, net profit, interest coverage ratio, return on capital employed, etc. These ratios will be helpful in showing financial performance of the business at a glance. These ratios show the growth and profitability of the business. Based on these ratios, lenders will calculate as to how much loan can be advanced by them. If your business's financial ratios fall below some specific levels, then there are chances that you may default.

You are required to submit Income Tax Returns of your business for past 1 to 3 years as the lenders demand. Generally lender takes last 2 years income tax return for determining your income eligibility against the amount of loan you applied for.

Interested to know Looking for a Personal Loan, Consider these Points before Applying

Lender may ask you to provide audited financial statements that include Income Statements, Balance Sheets, Statements of Cash Flow and Financial Ratios on a quarterly and/ or an annual basis. Through these statements it will come to know about the financial strength of your business which will help to decide whether business loan required by you can be extended or not.

You will also be required to submit your personal financial details such as your personal income, assets owned by you, your ITR, investments, debt taken by you, etc. Sometimes lender may require a personal guarantee by business owners like partners, promoters, etc. for the safety of loan.

It is also required to produce registration certificates like Shops and Establishment certificate, Excise / Sales Tax registration certificate, etc while applying for a business loan.

Interested to know How to negotiate a lower interest rate on a personal loan?

Lenders require bank's current account statement to get to know about the average transactions taking place in the business. Bank statement will show average monthly deposits, withdrawals, expenses and average balances that will support the size of the business loan that can be disbursed.