Small businesses require bank loans for any number of reasons, from financing their everyday operations to meeting their capital expenses. Both private and public sector banks are willing and able to grant small business loans.
While getting credit is not impossible, accessing it can be a challenge as it involves a pretty stringent vetting process. There are a couple of key questions that all small business owners should ask themselves, measures they must take, and important requirements that they need to be aware of, before they can consider themselves ‘loan-ready’.
Why do you need a bank loan?
As most of us have no doubt experienced, it is important you know exactly what you’re looking for before you go shopping, or you’re likely to end up buying things you don’t need. When you’re browsing the credit market for loans, ask yourself why you need these loans in the first place and what it is you hope they will help you accomplish.
Why do you need it? Are you planning to expand your workforce, and stock up on office supplies to meet the corresponding surge in resource-use? Then what you’re looking for is working capital or a short-term loan to meet a set of financially modest needs. However, if you have your eye on some new production equipment or are looking to buy a second processing or product assembly plant, then you will likely need a long-term loan. Each loan type comes with its own set of requirements. It is only when you know what kind of loan to apply for, that you can take this next step.
Which type of bank is best for you—public or private?
Private sector banks are a little more expensive to do business with than public sector banks. Unlike government-owned banks, private sector banks charge processing fees to cover their direct sales associates’ commissions. That said, there are many public sector institutions like MUDRA (Micro Unit Development and Refinance Agency) and specialized banks like SIDBI (Small Industries Development Bank of India) that lend SMBs amounts as small as ₹50,000 in the form of short-term and working-capital loans.
Do you know your personal and business credit status?
Banks want to know whether the organization they are lending money to is in good financial health. Many also want to know what the founder’s credit history is like as well. Indian public sector banks are reeling under the impact of loan fraud amounting to 1 lakh rupees, owing in part to a lax loan approval process that the current government plans to overhaul and tighten. Applicants have to be prepared to contend with strenuous appraisals and background checks.
Do you have a clear business development plan?
Now that you have a clear idea about what kind of bank loan you want and why, you will need to have an expense plan and budget to demonstrate how you intend to utilize this money. A solid Detailed Project Report (DPR) is an asset to any loan pitch.
Do you have the necessary documentation?
Finally, ensure that you have all the requisite documents, from your TAN and PAN cards, to your financial statements. Find out what you need to have in hand before you schedule your meeting with the bank. Preparation is half the battle, as they say. If you do your homework and have a clear understanding of your business prospects, you will be in a better position to leverage the banking system for that loan that you so desperately want.