Starting your own business is an exhilarating experience. After freeing yourself from the confines of a desk job, this new-found freedom seems surreal. Finally, you are your own master, have your own business and can do everything the way you had always imagined. But as per an old saying “With great power, comes greater responsibility”.
Now you do not have your manager or seniors to cover for you; you are responsible for your own actions. Whatever you do, whenever you do, will have serious financial implications and need your utmost attention. Initially, you must pull in all your financial resources to get your business started and need to introduce funds regularly to keep the company treading on the growth path. But then you only have limited funds of your own and after they have exhausted your best option is to seek lenders providing Loan facility for small-scale business.
Which Financial Institution Can Help You?
In order to support the varied financial requirement of small business owners, many financial institutions, private as well as public sector, offer different types of Loan facility for small business including capital loans for small businesses and small business loans for sole proprietors.
These loans are meant to be used for business purpose only and depending on the nature of requirements can be secured as well as unsecured. The rate of interest for these business loans vary from 10% to 18% with a maximum repayment tenor of 60 months.
With RBI issuing strict guidelines in regard to NPA’s, financial institutions are now following stringent criterion for screening business loan applicants. As such, if your business is new and has no credit history, then the application will be processed based on your profile. Therefore, you must sort out your personal finances to ensure the success of your application.
Personal Finance Tips to help your small business loan applications
If you are considering applying for a small business loan in the near future, here are a few tips that you must follow to increase the probability of your application being approved: –
Create a contingency fund
In the present conditions, most businesses are affected by cyclical fluctuations, and this leads to financial uncertainty. Therefore, you must make it a point to create a contingency fund during peak business season, which is enough to meet your expenses for at least six months. This fund will come in handy when you need to make your monthly instalments as well as payments. It will also be useful to pay the margin money if required by your business loan provider.
Reduce debt to income ratio
Most lenders calculate your debt to income ratio to gauge your ability to pay your instalments on time, after taking care of all your monthly commitments. Ideally, this ratio should be on the lower side to infuse confidence in the lender that you are not highly dependant on debt financing. You can try to reduce your dependency on debt as well raise your monthly revenue to keep this ratio under control.
Reduce credit card utilisation ratio
Credit cards are notorious for affecting your credit score. So, you need to make sure that you keep your credit card utilisation ratio under 30% at all times and also try to pay the monthly bills in full to avoid high-interest charges. If your credit card usage is on the higher side, you need to bring it under control to have any chance of success with your loan application.
Close multiple running loans
If you are looking to apply for a small business loan, it is advisable that you close all running loans as soon as possible. This will not only help with your debt to income ratio but also increase your eligibility for a business loan with a higher amount. This way you need not apply for multiple small loans and can efficiently manage one single business loan.
In order to save yourself from excessive expenditure in case a mishap, you must get different types of insurance to safeguard yourself as well as your business. Many insurers offer different types of business insurance policies which significantly reduce your liabilities in case of any incident.
Improve your credit score
You need to keep a close eye on your credit score and make sure that it is always above the level of 750. Maintaining a good credit score improves your business loan prospects and also entitles you to lower rates of interest. If your credit score falls below this level, then you must work towards improving it gradually, so that when the time for loan application comes, it does not create an obstacle in your path.
There are no shortcuts to maintaining a good financial discipline; you need to work actively and smartly to keep your personal as well as business finances in good shape.