As India’s startup ecosystem booms, it has become evident that startups’ contribution to the Indian economy is significant. The public sector and the government ably support this boom through ventures like Startup India and Atmanirbhar Bharat.

While this is an excellent time to be a business owner in India, it is also essential to understand the complex operations of a business. Financing a business is one of the most crucial elements to ensure long-term sustenance. Business loans, therefore, become of prime importance in this domain. However, a business loan is significantly different from other types of loans. Before taking one, all business owners must holistically understand these types of loans.

Here are some means through which you can wholly understand the process of applying for a business loan:

• Understand Your Business: It is crucial that you, as a founder, know the inside-out of your business thoroughly. When you apply for a business loan, you must have a detailed business plan and a business vision. The plan should cover all aspects of your business – short-term strategy, long-term plan, existing resources, expansion plans and so on. The more thoroughly you understand your business, the easier it will be to inspire the lender’s confidence in the bank.

Another aspect that requires complete clarity from your end will be the proposed intention of using the funds coming from the business loan; the bank is particularly interested to know what you’re doing with their money. Hence, it is crucial to focus on this element.

• Do a Risk Analysis: No matter how solid and robust your business plan is, it always faces uncertainty because of the dynamism of the market. Depending on the type and form of your business, several types of risks could be encountered by your company. For the lender, it is crucial to know what losses they will incur if your business suffers in the market.

If your business proposal includes a section on the risk profile of your business and the potential ways to overcome this risk, it paints a better picture for the bank. This section could focus on the dangers and weaknesses of the business, and the backup plans you might have to overcome this setback. Lastly, having a good credit score is essential, which gives you a good starting point with the bank.

• Choose the Right Product: Today’s loan market offers various instruments and effects. Each business has a particular set of needs that can be financed by a particular kind of loan product. For instance, if your business’ financing requirements are short-term, this can be financed by unsecured business loan that can be repaid within 48 months.

On the other hand, a long-term requirement would call for a secured business loan against property. Some businesses have high working capital needs. For such businesses, the best option is a working line of credit, such as bill discounting and overdraft facilities. Knowing the best loan product that suits your business needs can enable you to draft a robust proposal and negotiate better.

• Interest Rate Negotiation: The most crucial tenet of any loan is its associated interest rate. The interest rate of your loan will determine the monthly expenses that will be incurred. While borrowers are determined to negotiate for a lower interest rate, banks have reservations about such negotiations. For a business loan, factors such as the annual turnover, company profits, CIBIL score, and existing financials influence the interest rate accrued on your business loan.

Additionally, verified online sources and portals enable businesses to calculate their optimum interest rate, keeping long-term growth in mind.

• Payment Schedule Negotiation: Repayment schedules of your loans directly influence your business’s working, especially in long-term loans. Setting this in stone at the beginning of your relationship with your bank is essential. This will enable you to utilise the funds in the best interest of your business without worrying about repayment clauses. Another crucial repayment element is reading, understanding, and clarifying the bank’s repayment terms and conditions. Being thorough with these clauses can help you tremendously in the case of any eventuality.
• Determining Collateral: Some business loans are offered against steady collateral. This is crucial for the bank to lease, liquidate or sell if the company fails to perform. Usually, banks prefer collateral in the form of immovable or financial assets. Offering good collateral guarantees the lender that you can repay the loan amount. However, it is crucial to keep in mind that personal assets are kept to a minimum while offering collateral to the bank. This will safeguard your finances in the face of any eventuality.
• Loan Charges: Every form of business loan has some additional charges associated with it. These include processing charges, documentation fees, stamp duty charges, and so on. While these may be negligible amounts individually, they could be significant when put together. While going in for a considerable loan amount, it is desirable to understand these additional charges well and leverage your overall credit with the bank to reduce these additional fees.

Finally, the crux of negotiating a good business loan is viewing your company or business from the lender’s perspective. This enables you to understand their pain points and their reservations. It can also help you craft a solid plan to counter these pain points and offer holistic solutions for their concerns.