Banks always encouraged the growth of start-up and small-scale businesses and generously grant loans to promising ventures.
However, later the demand for business funding was far exceeding the supply. And resulted in the emergence of many non-banking financial institutions.
This trend further catalyzed industrialization by granting finances to all types of entrepreneurs.
Going a step ahead, digital technology has revolutionized business financing, and a new breed of non-banking financial companies called ‘FinTech’ lenders came into the picture.
Employing new models of online lending, the FinTech companies now use advanced data analytics tools to assess the creditworthiness of the borrowers.
Business loans for entrepreneurs
If you have started up a new venture and seeking for a loan to find working capital, you may be wondering who will be the most suitable lender to approach: a bank or a non-banking financial corporation.
With plenty of options open and their existing competition between lenders, borrowers now are in a privileged situation to choose which suits your interests at best.
However, the business loans which are suitable for each entrepreneur will be decided based on their credit history, nature of the business, total worth, and availability of the supporting documents to be plied with the application.
Further, we will discuss the points which matter the most during a lending decision making.
1. Processing time
Once submitting the application with necessary documents, it may take a few weeks’ time before the loan amount gets credited to you in case of bank loans.
Many of the established banks follow the stringent procedure in terms of verifying the credibility of the applicant and also to do the necessary paper works.
If you are in urgent need and cannot wait, applying with a FinTech provider may be an ideal option.
Most of these providers now offer online application and processing. The loans are usually approved in a day to two, and the paperwork is also kept minimal.
2. Collateral requirements
For many decades now, banks are offering individuals or business loans based on collaterals which you pledge as security.
This may be commercial or residential property, gold, vehicles, or other valuable holdings which will be liquidated if the borrower defaults the loan repayment.
The typical questions may be:
- When was the business established?
- Which industry does it serve?
- For how much time the business was up and running?
On the other hand, FinTech corporations now offer loans without any such guarantees too.
They assess the creditworthiness of a business and evaluate the business plans and budgets as well as the past financial performance to decide over credit approval.
Digital FinTechs are willing to support the new generation of businesses like e-commerce, digital marketing, and other sorts of innovative technology startups.
Nobody wants to be in debt and haunted. When you avail of a business loan, you are always in a plan to pay it off at the earliest possible.
However, some lenders may have policies blocking you from paying it off early with some penalties for pre-closure.
The basic logic is that the banks usually earn through interests paid by the borrowers each month and to ensure this in-flow, they grant loans for a longer tenure.
However, if the borrower is trying to break it by paying it off in full, some charge up to 5 to 10 percent of the capital amount as a pre-payment penalty.
However, most of the new-age FinTechs largely eliminated this burden on debtors.
The old-age concept of the pre-closure penalty is not there in the terms and conditions of many of these corporate leaders.
The flexible repayment option is given entrepreneurs to pay off loans at their pace and enjoy more financial freedom.
Processing business loans application
There are various items to be included while processing business loans application.
The significance of each item varies based on the industry and nature of your business in light of the amount requested.
However, if you have a business plan, most of these items may come as a part of it with a few you have to add necessarily.
Let’s have an overview.
1. Cover note
The typical title page of your application may read as “Loan application by Adam Smith, Business X, Address.”
It may also specify the contact number and date.
2. Cover letter
A business letter to the concerned requesting consideration for the line of credit as a business loan or overdraft.
The second paragraph of the cover letter may typically be a company profile, i.e., “Our company is a partnership firm in retailing of X goods and so on.”
3. Listing of content
To let the evaluator, know what all documents are included in your proposal.
4. Purpose of the loan and claimed amount
The next page must specify the amount you want as a loan and the plan of spending the loan amount.
If you are ordering new machinery, for example, include the estimate/quote, cost of freight, installation, etc.
5. Key people
The bankers look at the key decision-makers at your business who makes things run. You must share the whole info and profile of your management team.
It is also ideal to showcase the outside consultants too which will add value.
6. Market info
This page should include a description of your services or products and the target markets.
Also, describe how you are targeting your niche market and how successful you are at accomplishing it.
7. Financial projection
You have to include the following in your business loans application:
- Income statement
- Balance sheet, and
- Cash-flow statement
Draw out the financial projects as how much profit you are aiming to generate by utilizing the loan amount as the working capital.
Along with the above, you may have to furnish the details of the collateral as cash reserves, equipment, stocks and bonds, equities, and inventory, financial statements of the page, etc. to add more credibility to the loan application.
Above these, the lenders may also ask for some additional documents as specified in the instruction sheet.
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