While providing a business loan or a commercial loan most of the banks expect the borrower to fulfill certain important pre-requisites for business loan. These have to be kept in mind by every person availing the business loan. However, there are exceptions to all the rules but in certain circumstances. The pre-requisites of business loan are as follows-
- Collateral for pledging:
Most of the banks lend money to new businesses, start-ups or entrepreneurs but one condition of pledging a property or personal asset as collateral. Also, the Small Business Administration (SBA) in India has provided with certain programs that help the start-up business by guaranteeing some portion of the initial cost of business, which helps such businesses to borrow money from the bank along with the government administration. This also reduces risk factor for repayment of the loan amount for the banks.
Having hard assets to pledge for business loans in India provides the business with a back-up under all circumstances.
- Business Model or Business Plan:
It is one of the important Pre-requisites for business loan that most of the banks ask for during the application of the loan amount. A business model or plan document must be attached with the application. However, nowadays these documents can be very precise like a lean business plan and do not have to be detailed. But still banks want the applicant to provide with a standardized summary about the business, product, financials, target market and consumers and team.
- All the financial details of the business:
The applicant has to provide all the details regarding the financials of the company to the bank. These details must include the following-
- All bank accounts
- Current loans
- Past loans
- Incurred debts
- Investment accounts
- Tax ID Numbers
- Credit card account
- Address details commercial as well as residential
- Contact information
- Details of Accounts Receivable:
The applicant as part of the pre-requisites for business loan has to provide in the complete details of the accounts receivable. This must include-
- Precise information about account by account for verifying the credit
- Aging
- Sale transactions
- Payments history
- Details of Accounts Payable:
The complete information about the accounts payable of the applicant must be submitted as well. It must include all the details provided in the accounts receivables as well as the following-
- Details of companies that sell to the business
- Credit references
- Vouches for verifying the payments behavior of the applicant.
- Details of financial statements:
The borrower has to provide the complete details of the financial statements that are audited or reviewed. This pre-requisite for business loan is important as it gives the bank a solid ground to check the financial status of the company as well as the applicant. The financial statement must include the following documents and details-
- Balance sheet
- Assets of the business
- Liabilities
- Capital
- Profit and loss account statements
- All the details about personal financial:
The applicant has to provide with following details to the bank –
- Net worth
- Details of all the assets
- Details of all the liabilities
- Investment account
- Social security number
- Credit card accounts
- Mortgages
- In case of multiple partners, financial statements of all the owners or partners
- Information about insurance:
The banks, as per the pre-requisites for business loan, usually ask the applicant of new businesses depending on the key founders to provide life insurance details and information of one or more key persons. This is done by the bank to reduce risks.
- Copies of all the previously paid returns:
The banks want to see the filed returns by the applicant a part of the pre-requisites for business loan. These include-
- GST Returns
- Income Tax Return
- Input tax credit availed etc.
- Agreement on future ratios:
Most of the banks call for loan covenants, where the company or the applicant makes an agreement with the bank to maintain, certain key ratios namely;
- Debt to equity Ratio
- Current Ratio
- Quick Ratio
