Small business expansion and growth have been significantly aided by business financing. Almost 43 percent of small enterprises applied for business loans last year, according to Fundera’s reports. The most frequent reasons for borrowing money are purchasing machinery or equipment, paying previous debts, and business expansion. Nonetheless, it is up to small businesses to decide which financial institution to borrow money from. While some business owners prioritize unsecured money lenders, others favor traditional money lenders like banks and NBFCs. But, before applying for business loans for a small business, enterprises should consider a few crucial factors, regardless of the lender.
- Eligibility: Many traditional money lenders, such as banks and NBFCs, have set the eligibility criteria for small businesses to obtain loans. Many documents, such as bank statements, revenue statements, and tax returns, are required for business verification. Moreover, identity verification and personal documents of business owners are required. In comparison, unsecured business loan lenders avoid all eligibility criteria and verification.
- The Objective of Loan: Many business owners obtain a loan but often get confused about using the loan capital. Therefore, it is very important to set the loan objective before applying. Some businesses want a loan to hire a new employee but use that money in other departments. It should also be noted from which financial institute you’re considering a loan. Prioritize equipment financing if you want some loan capital for purchasing equipment or machinery.
- Good Credit Score: Good credit score is the most important factor for obtaining a loan. A credit score is an indication or expression of the creditworthiness of a business, which is grounded on your business history and personal information. Therefore, when businesses apply for a loan, their credit score is the foremost thing loan lenders check. A business with a high credit score has a better chance of obtaining a loan, while one with a low score needs to catch up. According to Experian, the average credit score to obtain a loan is 797 out of 999.
- Positive Cash Flow: Cash flow is the net amount of payments or expenditures a company receives. For calculating a cash flow, you should add your business income and non-cash income, then subtract the added amount from the capital expenditure of your business. Small businesses with a positive cash flow have a higher chance of acquiring a loan. However, in the case of unsecured money lenders, cash flow is usually ignored.
- Business Existence: Many traditional businesses loan lenders verify the business’s existence and duration. Small businesses that have been in operation for more than six months have a good chance of obtaining a loan. However, some business lenders have set this operating term to one year. An unsecured loan borrowing system requires no fixed business operating term.
- Nature of Operating Business: The nature of the business is another crucial factor in the money lending system. Mainly, all loan lenders neglect businesses related to charitable works and NGOs, as they are not a profit-making enterprise. According to some reports, marketing firms, manufacturing enterprises, and alcohol companies are businesses that get loans easily.
- Choosing Flexible Interest Rates: There are countless loans with different interest rates in the market. You should choose a business loan with good interest rates as it will not burden the repayment.
- Business Turnover: As mentioned earlier, positive cash flow is important in obtaining a loan. Similarly, business turnover is also closely related to cash flow. Small businesses with a good and profitable business turnover have a high chance of acquiring a loan.
Bottom Line:
Loans are a great way to fulfill the demands of your business. However, these factors should be considered before applying for a loan. Maintain all verification-related documents and eligibility criteria to obtain the best business finance loans.