Starting your business venture or expanding an already established enterprise needs working capital. A business loan is the ideal source of such funds. However, to avail of credit, you must convince lenders about the profit potential of loaning money to your company. You need to present an excellent impression of your business. Besides, you may also be asked to share the figures of your company to prove your repayment capacity. Here are some practical tips that can improve your chances of securing finance.
Keep the necessary documents ready
Lenders require your business details to understand the profitability of your venture. Maintain up-to-date accounting and tax records to make your business loan application seamless. You can consider hiring a professional accountant to prepare the necessary documents. Also, check the lender’s website for the information they need. Previous tax returns, articles of incorporation, profit and loss statements, and balance sheets are some common requirements. You will need to furnish your KYC papers and KYC documents of your business as well.
Improve your credit score before applying
Do not apply for business loans when your credit score is low. Instead, work towards improving your score with the following steps:
- Avoid late payments on existing debts
- Pay off outstanding dues
- Maintain credit utilization ratios (around 25%)
A good credit score builds up the investor’s confidence in your financial management skills. Avoid applying for multiple loans all at once. When you apply for a loan, a ‘hard-inquiry’ is placed on your credit score by the lender that shaves points off the score. Too many applications can dent your score significantly, thereby reducing your business loan eligibility.
Structure an actionable plan for your loan
Lenders often ask for a report that would detail how you intend to use the loan for business. Express a specific purpose by clarifying reasons for taking the loan, such as:
- Inventory purchase
- Business expansion
- Equipment upgrade
Discuss how the loan can improve your business profits. For example, show how updating equipment will increase productivity. A loan that can improve your sales will also increase your repayment ability, making you an ideal candidate for the lender.
Project sufficient cash flow and improve your debt service coverage ratio (DSCR)
Promote the investor’s faith in the promising future of your business by detailing your cash flow projections. Illustrate your company’s future income and expenses to optimize your loan application. Use your past cash flow statements and tax returns to validate your predictions. Lenders will also consider your DSCR to determine the availability of cash to afford a loan. Here is how you can boost your cash flow and increase your DSCR:
- Remove unnecessary expenses
- Cut overhead costs
- Increase sales income
- Pay invoices on your business’s name
Confirming enough cash flow and a high DSCR will reassure lenders that you will pay your equated monthly instalments (EMIs) on time.
It is essential to find a lender whose requirements align with your business’ needs. Tata Capital designs loans with terms that can meet the specific demands of every business. You can apply for business loan online with Tata Capital and fuel the growth of your enterprise.