29 Jul 2019, 13:59 — 8 min read
In my previous articles I discussed about various business loans and schemes every women entrepreneur should know about and government loan schemes for MSMEs in India. The most important thing while applying for a business loan is preparing your loan application itself and every bank carefully scrutinizes the borrowers before they lend money because apparently, business loans are the riskiest of all.
Here is a 101 on preparing your loan package. Read on...
Statement of purpose
A statement of purpose is one of the most important things that determine how lenders will consider your request for loan. It is either written as a letter or labeled as an ‘Executive Summary’ and is attached to the business plan.
It completely depends on you how you write down the statement of purpose but since it’s the first thing that the bank notices, it is advisable that you make it formal and informative. The following things should be a mandate:
You must remember that a strong cohesive business plan is what the lender is in look out for. Your business plan should spell out the exact agenda of your business and how you plan to achieve the short term and long term goals. It should essentially include the following things:
A statement of purpose is one of the most important things that determine how lenders will consider your request for loan.
A financial statement encloses your financial capacity, how much revenue your business is generating on a monthly basis and the overall performance of your business. A complete package of the financial statement will include the following things:
Now that you understand how you can prepare your loan transcript, let’s throw light on yet another integral part of applying/obtaining business loans—credit.
The 5 Cs of credit and why they are so important
The first C of credit is character and it measures your reliability and trustworthiness. It also refers to your reputation when it comes to financial matters. Methods to assess a borrower’s character can be both subjective and objective in nature. The subjective method may include analysing the borrower’s educational background or employment history and an objective method may include reviewing the borrower’s credit score or history. Most businesses don’t have any business credit, so they must rely on their personal credit score to apply for a business loan.
If a borrower has not managed to pay of his previous debts or has faced bankruptcy, then they might be in trouble as their character is not deemed fit for borrowing money from banks.
Capacity is your ability to repay the loan taken. Banks and lenders carefully examine your business viability, cash flow statements, repayment history and credit score to gauge if you can repay the loan on time. The capacity to repay the loan is also determined by analysing the number and amount of debt obligations that are still outstanding as compared to the income expected each month.
Condition is the terms of the loan itself. It may also include the current state of the economy impacting your business directly. Basically lenders want to know how you plan to invest your loan amount. You need to clearly state the reason behind borrowing the loan amount whether it is for capital investment, expansion of an existing business or equipment that you need for your business.
Capital in business is the amount of money that you have personally invested and the retained earnings from the business. Make sure that you invest properly in your venture before applying for a loan. Lenders and banks not only look at the amount of investment but also how far your venture has been benefited by it.
Banks usually prefer borrowers with a stable business plan and good capital. With the borrower’s money involved, it gives them a sense of security that s/he can pay back in time.
Last but not the least is collaterals. Collaterals are assets belonging to the borrower and the lender can rely on them in case of a default. The nature of collateral may consist of inventory, equipment used in your small or medium scale business and personal assets among others. One important thing to remember however is that the value of the collateral should be more than or equal to the loan amount. However, some businesses offer loans without collaterals these days.
Your loan package should be brief, concise and to the point and all the 5Cs of credit in place. The loan application should spell out the management strength of your business and convince the lender that your business is capable of tasting success.
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