Business Loan Application Process: A Step By Step Guide

Money is the lifeblood of any business. But this much-needed resource is often not easily accessible. During a cash crunch, availing of a business loan becomes a quick and easy way out and today’s business loan application process is simpler, more efficient, and straightforward.

This blog is a step-by-step guide to understanding the loan application process.

Step-By-Step Guide For The Business Loan Application Process

1. Understand The Types Of Business Loans Out There

Knowing the type of loan you need is the first step toward availing yourself of a loan. Business loans are classified into eight main types:

• Working Capital Loan

These loans help meet the daily business needs of organisations. Working Capital loans are usually short-term loans with a repayment tenure of up to 12 months. They are offered without collateral and have a higher interest rate vis-a-vis other loans.

• Term Loans

You need to repay this loan at regular intervals over a specified period. Generally, you must repay short-term loans within 12 months. Long-term loans, on the other hand, may sometimes extend up to five or ten years. Term loans are usually collateral-free and may be extended depending on an organisation’s needs.

• Letter Of Credit

A Letter of Credit is a funding guarantee provided by financial institutions to businesses engaged in international trade. Essentially, it is an assurance of payment given to businesses before they execute an international transaction.

• Bill Discounting

This type of loan allows a seller to get an advance at a discounted rate against their invoices or bills.

• Overdraft

The overdraft facility allows account holders of a bank or financial institution to withdraw funds even with a nil or zero account balance. The credit limit depends on the account holder’s relationship with the bank, credit history, etc. Banks usually offer overdrafts against collateral or securities like FDs.

• Equipment Finance

This funding method allows borrowers to purchase new machinery/equipment or upgrade existing ones. Big business houses usually avail of this facility in the manufacturing sector. The interest charged varies from lender to lender.

• Loans Under Various Government Schemes

The Government of India has launched various schemes, such as Mudra Yojana, Startup India, etc., to promote business activity in India, especially for women entrepreneurs, small businesses, and businesses engaged in backward areas. The loans under these schemes are offered by public and private sector banks, Regional Rural Banks, Small Finance Banks, and other financial institutions.

• Merchant Cash Advance

Also known as Point-of-Sale (POS) loan, it is a means to pay a lump sum in advance to suppliers through daily or future credit or debit card transactions. This funding option helps suppliers reduce their liquidity crunch. The interest rate is comparatively higher vis-a-vis other business loans.

2. Select The Lender Of Your Choice.

Once you have decided on the type of loan required, apply with the lender of your choice. Select the lender with the most competitive interest rate and efficient loan disbursing facility, among other features. Fill out the application form with your business and personal details correctly to ensure a smooth approval process.

3. Submit The Required Documents To The Lender

Once the application is verified, the next step involves submitting the necessary documents to the lender.  While the documents required vary from lender to lender, some essential business loan documents and process that every lender demands include:

• A detailed business plan or future projection
• Last 6 months’ bank statements
• Last 2 years' Income Tax Return forms and audited Financial Statements
• KYC documents of the business organisation - PAN, Certificate of Incorporation, MOA/AOA, etc.
• KYC documents of the business owner - PAN, Aadhaar, Voter ID, CIBIL Score, etc.

4. Get The Loan Approved

The final step is getting the loan approved from the lender. If the application form and other documents submitted are in order, this step will execute smoothly!

5 Things To Take To Ensure That Your Loan Gets Approved

• Have a strong, detailed, and well-chalked-out business plan. Lenders’ trust in you and your business directly results from your business plan.
• Be very clear on the amount of loan you require. The projection should be precise. Overestimation or underestimation of your financial needs can result in financial trouble later on.
• Ensure that you have a credit score of 700 or above. Lenders may not grant loans to people with a credit score below 680. So, if your credit score is low, work on it and raise it to a decent level before applying for a business loan.
• Do your research well! Use freely available EMI estimation tools like a business loan calculator, compare all the lenders in the market and choose the one most beneficial to you.
• Keep your documents and financial records prim and proper.

Apply For Your Business Loan With IIFL Finance

Take your business to new heights with a business loan from IIFL Finance. The entire loan disbursal process is 100% digital with no paperwork. With IIFL business loans, you will get the required capital for your business at an industry-best interest rate, along with pre and post-disbursement support.

Frequently Asked Questions

Q1: Do business credit scores also matter while availing of a loan for your business?
Ans: Yes, along with the owner’s credit score, a business credit score also impacts a lender’s decision to grant a business loan. Credit rating bureaus, such as CIBIL, Equifax, etc., collect information from vendors, suppliers, court filings, banks, and other sources to generate business credit scores.

Q2: Does business loan impact taxes?
Ans: Interest on a business loan is classified as a business expense and is tax deductible. The principal amount, however, is not tax-deductible.

Q3: Is the interest rate fixed or floating?
Ans: The interest levied on business loans is usually fixed.

Q4: What are the eligibility criteria for availing of a business loan?
Ans: This can vary from lender to lender. But three things that every lender ensures before disbursing business loans are:
• The business should show a profit for the last three consecutive financial years.
• The business should show an upward turnover trend.
• Financial Statements should be duly audited by a Chartered Accountant.