Working Capital Loan Tips To Know Before Applying

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They say it is better to be safe than sorry. This is something every entrepreneur must learn especially when they are taking up a business loan. When businesses feels a cash crunch and urgently need liquidity to meet their working capital needs, taking up a loan seems like the best bet. But before applying for a loan there are certain things an entrepreneur must know. 

Keep the following pointers in mind before you head out to secure a loan for working capital: 

1. Ask The Right Questions 

Taking up a loan is a big business decision. So before applying ask all the relevant questions: 

● How much money do you need? 
● How will you use the money? 
● Have you considered all other options? 
● Will your business benefit from this loan? 
● What is the cost of the loan including additional charges and processing fees? 

2. Check Your Numbers 

Once all the questions are addressed and the groundwork is ironed out loan it is important to have a chat with your accountant. Discuss with them about what’s realistic and how much debt your business can afford to take up. Sometimes businesses borrow more than they can afford and this puts a financial burden on them. So before you apply for a loan first sit with your accountant and create a budget. Make sure you make an informed decision based on your business numbers. Track the business progress and its performance to see what’s working and not. Only if you’re making more than the interest payments every month will you be truly leveraging the loan for your growth. 

3. Compare Prospects 

You can fund your business either with debt or with equity. Nowadays there are SME exchanges where small businesses can raise funds by selling equity. At the same time under debt a business has so many options to choose from. There are government schemes, public sector banks, private banks, fintech lenders, NBFCs, and P2P lenders that provide loans to the MSME sector. Each lender has a wide variety of loans to offer- working capital loans, term loans, equipment financing, line of credit, start up loans etc. 

So first narrow down a lender based on interest rates offered, processing fees charged, repayment schedules and as well any other charges. Read the terms and conditions offered by every lender and don’t just pick a loan based on interest rates. Do all your research before selecting a lender and then pick a loan that will suit your business’s needs the best. 

4. Know Your Credit Score 

The Credit Rating Information Services of India Limited (CRISIL) rates businesses on the basis of their financial position. This rating, ranged from 300 to 900 reflecting the creditworthiness of a firm. A higher credit score means your chance of getting a loan approved will be higher. Sometimes lenders might offer you a lower interest rate if you have a high credit score. And certain types of loans such as invoice discounting or merchant cash advance don’t even check your credit score. So depending on your loan needs its best to check your credit score and make corrections in case of any errors. 

5. Ascertain The Eligibility Criteria 

Borrowing a business loan isn’t just a financial risk for the entrepreneur but also for the lender. That’s why there are certain eligibility criteria a business must fulfill before they apply for a working capital loan. It’s important to note that these criteria might differ from lender to lender. For instance to apply for a business loan at HDFC Bank the minimum turnover must be more than Rs.40 lakh. But to apply for a business loan at FlexiLoans the minimum turnover must be Rs.12 lakh. The basic eligibility criteria for all lenders will include a minimum age limit, history of profitable business, and decent annual turnover. Read these carefully before applying for a loan and compare the eligibility criteria across lenders. 

6. Keep All Paperwork Ready 

Applying for a loan requires some documentation. While traditional modes of procuring loans such as banks may ask for heavy documentation alternative lenders such as fintech companies don’t ask for a lot. The basic documents that you’ll need will be: basic KYC documents (1 address proof and 1 identity Proof), 6- 12 month bank statements along with business establishment certificate. 

Other than those ITR statements, audited financial statements and tax receipts may be asked for assessing the credit eligibility. Once your business is eligible for a loan, you will also have to submit a duly filled application form with the above paperwork.

I hope you enjoyed this article about everything you need to know about getting a working capital loan for your business.

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