Business funding is one of the tricky areas which may sometimes lead the business owners towards troubled waters. It’s a good practice to compare various business financing options to pick the best and least complicated one.
However, while doing so, business owners often lose sight of the main purpose of business financing. They just begin applying to various financing institutions based on the offers available. This, without questioning the need for a larger loan or understanding the business’s specific loan requirement.
To make things easier, the experts at CreditMantri share the key questions that a prospective borrower should ask before applying for a business loan.
Why Does My Business Require Finance?
If you are a business owner and are looking to apply for a business loan, you must first be clear about your business and the reason for which you need the finance. When you have the specific answers to these, your decision-making will be far smoother and clearer. Once you know the reason for financing your business, you will be able to tick off some of the options that won’t help your business.
For example, you can either borrow a term loan or a line of credit depending on your area of work. The amount of cash flow available with the business will also influence business loan decision-making. Lenders will mostly prefer to lend to those businesses which can project clarity at the outset or while making the loan application.
How Much Money Does the Business Need?
When you approach a lending institution for a business loan, the first question you will be asked is, how much money does your business need? Hence, be prepared with a detailed answer to this question before you approach the bank or NBFC.
To answer this question, you must know the exact amount of money your business will require for achieving the established goals. This means you should have a business strategy in place. You should also be clear about the near-term and long-term objectives and goals of the business. Answering these questions will allow you to estimate the money, energy, and other resources needed for achieving the goals.
The main idea of preparing for this question is to ensure that your borrowings are measured and the business will be able to repay what it borrows. It will help you to make an informed decision about your requirements, capacity, and capability.
What is the Eligibility Criteria for the Loan?
While making a business loan application, owners may miss taking note of the lender’s eligibility criteria and proceed with the application in haste. This is because of the constant focus on a business’s requirements over the lenders.
Understanding the basic requirements set forth by the lender will help in creating a wider option range for generating business finance. A lot of time and energy can also be saved by ensuring that the terms of the lender are well-understood before any further actions. Failure to do so may result in additional time spent over minute details which the business has to constantly clarify at all steps.
Will the Lender Check My Personal Credit History at The Time of Business Loan Application?
As part of their due diligence process, lenders look into the personal credit history of business owners. The reason to ask this question is that most lenders do not view the business owner and the business as separate entities.
So, make sure to check your latest credit score and take the right measures to improve it before applying for a business loan. You can check your personal credit score and business score within a few minutes at trusted sites like CreditMantri.
What is the Overall Cost of the Loan?
Once your business has the required credit from the lender, you need to estimate how much it will cost the business to source and use the credit. This includes knowing the applicable interest rate, tenure of the loan, fees if any and as applicable. Even if you have the interest rate mentioned on paper by the lender, it makes sense to calculate the total interest rate that the business will pay and weigh it against other available credit options to know the actual cost of the loan.
When Does My Business Require Funding?
Any business funding process is generally measured in weeks or months. If the business is in urgent need of money, you might not have the time to bargain across various credit providers. For urgent cash requirements, you can source a business loan online since it takes less time for processing and getting credited. However, if the need is not urgent, it may be sensible to wait till you get a better bargain.
Does the Business Owe Other Creditors?
Outstanding loans in any business can affect its ability to fetch a fresh loan. Depending on how the business plans to pay off existing creditors, a bank or lending institution may be willing to consider the loan request.
How Strong are the Financials of the Business?
Any business which is in a good financial shape can get loans easily as compared to those that are not. An established business will find it easier to qualify for business funding. For new businesses, banks may ask for collateral since they will be bearing the risk of lending to a new set-up.
Asking all of these questions will help you understand your business’s capability to get a business loan. These will also allow the business to get finance at a good price. While answering these questions, you may want to take the help of an accountant or business adviser. This way, you will have data-based responses ready for the lender or creditor at the time of application.