Micro, small and medium enterprises (MSMEs) comprise a significant percentage of the country’s economy. However, most SMEs are unable to grow their businesses due to lack of capital. Raising debt from financial institutions is difficult for such entrepreneurs.
However, securing institutional fund is possible when you do it in the right way. Before discussing on how to avail of funding, let us understand how this money may be used. You may use these funds to expand your business, meet working capital requirements, purchase plant and machinery, or meet emergency cash needs.
Here are five steps that ensure an easy approval of your business loan from a financial institution.
- Determine why you need the funds
This is an important step because it will help you find the right type of financial product. You may need business finance to take advantage of an excellent business opportunity, meet temporary cash shortfalls, or cover seasonal ups and downs.
- Analyze your financial situation
You may not accurately know how much money is needed. Thus, you must analyze your financial situation to realistically determine how much SME loan amount you may be able to service without any trouble. One way is to calculate the debt service coverage ratio (DSCR). This ratio is used by lenders to analyze if you will be able to make timely repayments on the loan before approving your application.
- Collect important information about lenders
Such loans are offered by banks as well as non-banking financial companies (NBFCs). Different institutions provide various products with specific terms and conditions. It is important you compare the different lenders before making your choice. You must analyze the business loan interest rates, documentation requirement, repayment period, amount, and much more before making your decision.
- Check your eligibility
Lenders consider some important factors before approving your loan application. Some of these include your credit score, number of years in business, profit and loss statement, balance sheet, annual turnover and profitability, and the average bank balance. Financial institutions look for stability and consistent performance to reduce their potential risks before approving the loan application. It is recommended you check your eligibility using an online calculator before applying for an MSME loan.
- Assimilate the necessary documents
After comparing and understanding the different options, you must submit the application form along with the required documents. Some of these include ownership proof, audited financial statements, know-your-customer (KYC), income tax returns, bank statements, and Form 16A. Once you have the necessary documents, you may apply for the loan. It is possible that the lender may require additional documents or clarifications after you submit your application. Providing quick and reliable responses will increase the possibility of approval.
When you apply for such loans, you may need to pay certain fees and charges. These may include legal charges and processing fees. It is important that you clarify such charges to ensure you are not surprised later. These additional expenses may increase the effective borrowing cost and to know these beforehand is important.