For any entrepreneur or new business owner, the importance of a commercial business loan cannot be underplayed. For the uninitiated, a commercial business loan is given out to small businesses to use as working capital for purchasing real estate, inventory and equipment in most cases.
Purpose of a Commercial Business Loan:
Typically speaking, these commercial business loans are provided by lenders whether they are banks or other big or small financial institutions to help propel the growth of a small business and contribute to the sustainability factor. Of course, given that there is a considerable amount of risk involved the lender takes the decision of whether to loan out or not based on the financial strength of the business plus on assessment of the profitability of the idea.
What do you need to furnish when applying:
Generally speaking most lending institutions especially banks do need the business owner to furnish specific information before the loan can be approved. In some cases, lending institution is willing to take some risks and may not be as stringent or as detailed when asking for information but the general rules do apply more or less.
Here are a few basics that might be mandatory:
–Business plans: This is a basic requirement in most cases. A dynamic and robust business plan that details the vision and mission statement along with information regarding the product and services, the team and basic financials is to be submitted with the application. This is one of the most critical documents and can lead to the final decision being taken in favor of the applicant or not.
-Basic financial information: Given that a commercial business loan is usually given out to help scale and grow the business, the lending institution will require information regarding existing turnover, the current cash flow system in place and of course the profit and loss statement on record. Having this information handy helps the lender to understand the length and breadth of the current financial situation of a business and then take a call on whether to give money or not.
-Credit records: This too in a way is part of the financials declarations. In this case information about all accounts payable, accounts receivables, all past credit history as well aspersonal financial details in some cases may also be required. Again, this depends from institution to institution. While some might be willing to let go, others might be way more particular.
What to assess as an applicant:
The assessment process should be a two way street when applying for a commercial business loan. While the lender is going to cover all bases it is also important for the borrower to do all due diligence before deciding who to go with for the application. Points of consideration should include:
-Understanding the basics of the commercial bank loans
-Complete clarity on what the per month EMI is going to be
-A comparison of the fee structure of different lending institutions
-The services and value add that different institutions are providing
-Clear understanding of the prepayment charges as well as the rate of interest that will be charge. This is extremely important, as this will determine your final re-payment structure.
Preparation before the application:
There are a few things that one needs to prepare and have full clarity on before applying for the loan. Two key points here are for the business owner to know what the loan is for and how much money will be required.
These are the first two questions that are going to asked and any ambiguity on this front can create problems later. There are a number of reasons for which a loan can be obtained. There could be plans of expansion, scaling of the business model, purchase of assets or in some cases even to cover up some financial losses. Whatever the case might be, its important to be clear. Ditto for the amount required.
With all of this taken care of and documentation in place, it should be easy go from thereon.