Normally taken by micro, small, and medium size enterprises (MSMEs), for funding their long and short-term business needs, small business loans have emerged as an important funding source for all modern-day start-ups. However, it’s not easy to avail of such credit at a favorable business loan interest rate. With a large number of small businesses applying for such loans, there’s vast competition in this space today.
When it comes to applying for such a loan product, it’s important for the business to put itself into the shoes of the investor, and understand if they’d feel confident enough about lending money based on the provided information. Below we will take you through some important steps through which you can successfully qualify for a small business loan, at an attractive interest rate.
Create a good Business Plan
Just like it’s important to plan for all important events of your life, it’s very important to create a solid and believable business plan to successfully avail a small business loan too. Please note, business is both a social and an economic entity. Therefore, you must carry out a fair assessment of your operations, under the prevailing socio-economic conditions.
For instance, if your plan is to set up a food processing unit, you cannot expect lenders to believe you if you don’t have ample knowledge about wastewater treatment. Not having enough knowledge can also lead to regulatory complications at a later stage. Your business plan should also throw light upon the experience of the management team, company overview, market analysis, and financial projections.
Manage Cash Flow
It’s important for the lender to know that if they’re offering you attractive business loan rates, they will make their investment back in time. The cash flow figures of your business are a reflection of its liquidity position. Special attention should be paid to DSCR (Debt Service Coverage Ratio) as it shows the ratio of available cash for servicing debts.
Some of the ways to improve your cash flow and therefore the chances of availing a good business loan interest rate are reducing overheads, enforcing payment discipline, making invoice payments in your business name and getting rid of unwanted expenditures.
Improve Credit Score
Your business’ credit score is a reflection of your financial management skills, and that’s why investors give a lot of weightage to it. Please note, there’s a good chance that an investor might access your personal credit score too, before agreeing to invest in your small business.
A healthy credit score can build up the investor’s confidence in your repayment ability. Some of the factors that contribute to credit score include payment history, outstanding debts, business size, and credit utilization ratio. In order to maintain an optimum business credit score, you should pay expenses and bills in time and maintain a credit utilization ratio in the vicinity of 25%.
Back Your Application with Proper Documents
Having all relevant documents ready can improve the chances of not just the approval of your business loan, but also a good business loan interest rate. It gives the lender an impression that you’ve done your homework and are well prepared for the business.
Some of the documents you might need to submit to the lender, along with your application include – bank statement, identity proof, proof of business continuation, address proof, and latest income tax returns with P&L account, income details, and balance sheet of the last 2 years. Some lenders might ask for additional documents too.
Have a Repayment Strategy Ready
You should have prepared a detailed plan for the repayment of the small business loan. Confidently communicating your repayment strategy to the lender can build their confidence and enable them to offer you an optimum business loan interest rate.
Last but not the least, you shouldn’t settle with the first lender you come across on the Internet. Compare business loan offers extended by multiple lending establishments, at a reputed platform like GoSahi.com, and only then go ahead with the rest of the process.
Also, Read This: Benefits of Taking Flexi Personal Loans