With the start-up culture thriving in India, enterprising individuals are keen on applying all possible innovations to give a distinct image to their brand. In addition to the creation of products that are directly related to digital technology and computer coding, the conventional services across industries such as food, travel, hospitality, events, housekeeping and education have also been tailored for unique customer experiences.
Regardless of the size of a venture, there are phases in the business cycle where owners seek financial support to fuel the growth of their enterprise. In a fiercely competitive environment and an ever-growing economy, it is also necessary to use every available opportunity for progress. This is when businesses look for a commercial loan. A lump sum amount used exclusively for business expansion or upgrade can give it that extra impetus to move to a new stage of development.
When you start searching for business loans, you may be overwhelmed by the number of choices you have in the market today. The credit products that were once available only through scheduled banks can now be procured from a growing cluster of digitally active non-banking finance companies (NBFCs), referred to as FinTech companies.
The chief benefit of approaching FinTechs for commercial loans lies in the flexibility of sending the application and getting the amount without having to wait for weeks. The application is submitted online along with the soft copies of essential documents that demonstrate the eligibility of the business for a loan.
If you wish to get a valuable commercial loan from an established FinTech, use these guidelines to get the best offer from your chosen source:
1. Pay your vendors’ and utility bills on time
Institutional lenders, including banks and FinTechs, look at the credit rating earned by your business while evaluating it for a loan. In India, the scores calculated by credit information agency TransUnion CIBIL are commonly used for this purpose. A score of 750 or more smoothly qualifies an enterprise for the credit.
Among other things, this credit score depends upon your business’s timely clearance of its accounts payable. Therefore, it is advisable to pay all your vendors and utility suppliers such as electricity and telecom companies on time. Do not keep outstanding invoices on your books for too long. Your promptness in paying off the bill amounts will help you earn a higher credit score. You may make online payments or pay by cheques; just ensure that it does get credited before or on the bill due date.
2. Maintain financial records well
The business and financial details entered in your application for commercial finance will be verified through the documents that you submit with it. Therefore, irrespective of the size and history of your business, do not neglect its account books. Professionally maintaining the balance sheets and profit & loss statements is also important if you are serious about the growth of your business. Under Section 44AB of the Income Tax Act, all businesses with a gross turnover of more than 1 crore are required to maintain books of account for a tax audit.
While applying for loans from FinTech, you do not need to submit plenty of documents to support your application. These companies generally need to see the basic documents establishing your business’s creditworthiness. The bank account statement for the last six months, recent Income Tax Returns (ITR) processing documents, latest GST returns and KYC documents for the business should be submitted for the verification. These can be submitted online and there is no need to deposit hard copies in the FinTech’s office. Being the owner, you will also be required to provide your own KYC documents such as Aadhar or PAN card copy. If at all you had an approved loan in the recent past, do provide a copy of the sanction letter to your new lending organisation.
3. Analyse your loan to income ratio
Lending institutions need to check if the borrowers have a surplus from their current income to meet their loan obligations. In managing your own business, you understand your business liabilities the best. Ensure that after paying salaries to your staff and bill amounts to your vendors/suppliers, any applicable taxes and other miscellaneous expenditure, you have a sufficient margin of revenue to pay your loan instalments on time.
Ideally, the total EMIs paid on a commercial loan should not exceed 30% of the income generated through business. Furthermore, do not mix your personal or home loans with business loans. Maintain savings and business profits for EMI payments on the enterprise’s loan as a separate fund.
4. Do not apply for too many loans
This is another factor that affects a borrower’s credit rating from CIBIL. If you apply for or even formally enquire about business loan offerings from multiple organisations within a short period of time, an enquiry is made by most (or all) of them into your CIBIL credit score. This, in turn, shows that you are desperate for loans. The credit score can dip as the number of such enquiries increases. Taking multiple loans will also put extra pressure on the repayments and dilute your business profits.
A better approach is to first obtain a copy of your business’s score personally, do an online research and then approach relevant lenders who can offer you the most affordable financing. Also, in calculating the total cost of the loan, do not just look at the interest rate charged by the lender. Consider the processing fee, loan insurance charge and applicable prepayment penalties, if any. FinTech companies have endeared themselves to many a business borrower because of their ‘no prepayment charge’ flexibility. In other words, if you decide to pay off your outstanding debt before completing the full EMI schedule, you will not be charged anything extra by these digital lenders.
Getting a loan that suits your unique business needs is not difficult in an era where the demands and supplies in the market are bridged by a few clicks on a computer. You simply need to ensure that you are well prepared and have chosen your lender astutely.