How difficult is it to get a loan for your business?

By Rishi Mehra

Business loans often serve as a backbone for an enterprise and this is particularly true for a small business. There is no one definite answer on how tough or easy it is to get a business loan since a number of factors comes into play for a lender to arrive at a decision. However, given the current condition of most banks, it is a tad more difficult to get a loan.

Having said that, the following play a big role in determining how easy or difficult your loan raising process would be.

Stage of your business - The stage of your business is a huge factor in determining how easy or difficult it is to get a loan. This is similar to an individual seeking a loan, where at the beginning of your career or maybe even the first job, it is generally difficult to get a bank to lend you money. Similarly, if your business is at an early stage and has been in existence for only a short amount of time, banks may hesitate to lend. However, a business that has been around for some time with a proven track record of operation is likely to find the loan raising process that much simpler.

Competition - The nature of competition that your business faces can impact the loan decision in two ways. When making a lending decision, banks can look at your competition to figure out where you stand among your peers. If you are at par or do better, getting money becomes easier and vice-versa. On the other hand competition is also taken into account to gauge the larger picture. For example, if the competition is intense and existing players are in a tough fight, banks may not be very comfortable in lending. A classic example is the telecom sector where intense competition among big players has made many activities unviable.

Economic conditions - At the end of the day, many decisions that a bank takes depends on the prevailing sentiment in the economy. When the economy is doing well, the mood is upbeat and business sentiment is optimistic, it becomes easier to raise money. However, many businesses during the downturn of 2009 and also during demonetisation would have found that getting a loan from a bank is difficult. If the economic condition of the country is not good and in fact, if there is global uncertainty, the prospects of raising a loan becomes difficult.

How much you need - How easy or difficult also depends on the amount of money you need. If the amount you need is relatively modest, it may be easier to get a loan. However, for bigger needs banks may ask for additional details and set provisions that may make the loan raising process tougher. Small amounts that are in sync with your earnings or cash flow may be easier to raise, but anything that stretches your financial position may make a bank think twice.

Existing relationships- It will always be easier to raise money from a bank with which you have existing relationships. Such a bank and branch would have greater visibility of your business, greater understanding of the state of your finance and may have already extended a loan previously. This gives greater comfort to your bank in arriving at a lending decision and may make your loan raising process easier.

There are other factors that play an important part in your loan process. Banks would want to know the purpose of wanting to raise a loan and would look to ascertain if it is a valid proposal. At the same time, credit score is vital and a good credit score will make the loan approval process easier. Similarly, banks would also look at your revenue & cash flow to figure out the health of your business and the repaying capacity. Good health of your finances would mean it is easier for you to raise a loan.

Most banks also want collateral as a security for the loan. Collateral that is incommensurate with the amount of loan you seek, makes the process easier. At the same time you would need to ensure that your paperwork- from financial documents to your business plan is in order.


(The writer is, CEO, Wishfin.com)