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7 Tips to Get a First Time Business Loan Approved Without Facing Rejection!

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Last year, when Kolkata-based architect Siddhartha Ghosh tried to get a first time business loan from a leading private bank, he faced rejection! Even after providing a number of documents, the bank didn’t approve his business loan application. Because his credit profile did not “match” the bank’s eligibility criteria.

Business loans can prove to be a lifeline for a business, but securing one is an overwhelming process. More so, if you are trying to get a first time business loan with bad credit. Most banks are reluctant to give loans to small businesses with no credit history, as it is a risky venture from their perspective.

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There, however, is hope. Business loan approvals depend on varying parameters. If you can understand them, it lowers the chances of rejection. Here are 7 tips to help you get a first time business loan without facing rejection.

first time business loan

Know Your Credit Score And Work on it- The Crucial Step to Get a First Time Business Loan

Log on to CIBIL’s official website to find out more about your credit score. Banks in India usually check your CIBIL score before approving the loan application. However, different countries have their own credit rating agencies and the system might vary. So it’s better to check that out to properly plan your first time business loan application.

factors that decide credit score
Image source: mymoneysage.in

To get a first time business loan the hassle-free way, you  need a 750+ credit score. The credit score proves your creditworthiness, i.e. you ability to pay back the loan in time.

Even if you have a solid balance sheet, your business loan might not get approved if you have a poor credit score.

In case your score is below the 750 mark, focus on building it first. You can improve your credit score by taking a small personal loan or car loan and paying it on time. Also remember to pay your credit card bills without fail, to improve your credit score.

Showcase Your Business Expertise and Experience

Face the harsh truth, you won’t get a business loan if you are a starter.

Most banks ask for the last 3 year’s financials to verify your business experience. Otherwise they won’t even touch your business loan application!

As an applicant, you have to furnish documents like your Trade License or Certificate of Incorporation, which validates the tenure of your business.

If you are a professional, showcase your professional expertise in respective field. This will give you a significant advantage when you apply for a first time business loan with bad credit.

Keep Your Profit & Loss Account and Balance Sheet Ready to Get a First Time Business Loan Quickly

Financial reports like Profit & Loss statement and Balance sheet, help banks analyze the profit-making capacity of your business. Based on the balance sheet and P&L Statement, banks test your loan repayment capability.

You should always take the help of an experienced accountant to manage the financials of your business. This not only ensures reliability and accuracy, but it also boosts the creditworthiness of your business.

So, keep your business balance sheet and P&L statement ready (preferably last  2-3 years), before placing your first time business loan application.

Prove to the Lender That You Have Sufficient Cash Flow

Since you are a first time business loan applicant, the cash flow of your business will play a crucial part in loan approval process. A healthy cash balance, after covering all operational expenses, uplifts confidence of the lender.

Here are some suggestions to improve the cash flow of your business –

  • Cut down on needless expenses
  • Maintain a proper invoicing structure
  • Build an emergency fund
cash flow management- key criterion to get first time business loan
Image source: Slideshare- DBS

Clarify Your Need for the Business Loan

Banks won’t sanction a business loan until and unless there is a genuine requirement for funding. So, it is important for you to explain why you need the loan and how you will use it. Depending on your explanation, the bank will decide whether it will be profitable for them to fund your purpose.

If the bank does not find your need viable enough, it might reject your loan application. 

As a first time business loan applicant, submit a DPR, i.e. Detailed Project Planning Report. This will add a substantial weightage to the loan application. The DPR helps banks assess if the requirement is genuine and whether your business actually needs this much funding.

How to draft a detailed project plan for loan approval? Read it here.

Pay Your Business Tax and Personal Tax Regularly

To sanction a first time business loan with bad credit, lenders may ask you to submit your personal ITR. Filing. This is in addition to your company’s Income Tax Return (ITR).

If you submit both business and personal taxes on time that makes a positive impression on the lender. On the other hand, irregularities in business and personal tax filing may lead to the loan application rejection.

Keep Collateral Handy To Confirm Approval of Your First Time Business Loan

If you don’t have any previous repayment history, banks might ask for a collateral security from the first time business loan applicant.

Collateral securities are tangible assets, which include various asset classes like property, building, fixed deposits, gold, share certificates, heirlooms, etc.

Banks seek tangible assets to secure their investments in case the borrower defaults. Before applying for a business loan, make a list of the assets you can provide if required.

The Summary

So, here is a round-up of the steps that will help you get a first time business loan without being rejected –

1 – Know Your Credit Score

2 – Showcase Your Business Expertise and Experience

3 – Keep Your Profit and Loss Account and Balance Sheet Ready

4 – Prove to the Lender: You Have Sufficient Cash Flow

5 – Clarify Your Need for the Business Loan

6 – Pay Your Business Tax and Personal Tax Regularly

7 – Keep Collateral Handy

To conclude

It might happen that by fulfilling all the above criteria, your big-ticket loan gets sanctioned. Now don’t start celebrating! A huge loan also means a huge burden to repay on time.

Start by asking yourself, “How much loan do I need?” If you can’t answer, then you MUST consult a financial advisor. He/ she can correctly determine the amount of loan you require. The advisor can also assess the chances of your first time business loan getting approved/rejected.

And finally, if you feel it is too difficult or almost impossible to get a first time business loan from bank, then you can explore other options too. You can join a peer-to-peer lending community or a business credit circle to overcome your business financing worries! And yes, you can actually use a credit card to fund your small business.

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