5 Financial Habits That Will Help You Avail a Business Loan

The smooth functioning of a business is heavily dependent on fulfilling credit needs. Small business loans are an excellent option to fulfil the funding requirements of the business requirements. There are many small businesses and micro-enterprises that come forward to financial institutions for their credit needs. But not all applications are granted loan sanction. The primary reason for the rejection of a business loan application is the ineligibility categorization of entrepreneurs and business owners.

The business loan eligibility is determined by the application of various criteria, which include both technical and general. When small businesses apply for a business loan, they need to be educated on the importance of following certain financial habits to get an obstacle-free business loan. Banks and financial institutions decide to evaluate different business loan applications by evaluating the financial hygiene of prospective borrowers.

Let us have a thorough look into the top 5 financial routines that should be followed by entrepreneurs who seek to apply for a business loan successfully:

Maintaining Optimal Cash Flows

If you wish to maintain the business’s sustainability in an unhindered way, you should focus on cash flow management. This aspect is crucial as business organisations must have a robust and flexible payment/receivables schedule. This helps ensure that the business stays solvent and improves the credibility aspect of the business in terms of the lenders and stock markets.

If payments are delayed, it will have a negative impact on the levels of your work capital. Sub-optimal cash flows tarnish the chances of a successful procession of business loan applications.

Organisations process the business loan applications with favourable interest rates when the bank statement’s cash flows are consistent. Periodical cash flows indicate that the business is doing well with its various partners and customers when entrepreneurs want to apply for a business loan.

What is Cash Flow?

It can be defined as the money circulation in a small business. A positive cash flow indicates that a higher quantum of money is coming into the organisations than which is going out. It is vital to evaluate the business’s performance when the time comes for positively considering the business loan application. 

  • The business firm may have a higher overall profit generation, but if the cash flow is decreased, there might be structural issues like ordering too much stock or overshooting the expenses. 
  • Business loan applications are judged on their ability to grow fast when compared to their competitors. This is the reason why cash flows are considered prominent in making decisions of buying stock, expanding the employee base and acquiring new business verticals.

Cash flows are important to make enriched business plans and informed decisions.

With a robust cash flow statement, the accurate quantum of funds that need to be with the business can be calculated. This is essential as all planning decisions must be reinforced with cash flow information. Misstatements of cash flow statements will lead to a domino effect on planning and budgeting decisions and will severely affect small organisations’ business outlook.

Cash flows help to understand where the small business is spending money.

Effective cash flow management is vital in getting an accurate picture of where the business money is being spent on. Cash flows are a subtle mechanism as financial managers cannot measure the true potential of cash flows from profit and loss statements. 

Expenditures of a small business should be properly delineated, and it is hard to evaluate the specifics of expenditure without the analysis of cash flows. Cash flows help in identifying areas where the business can shut down unprofitable operations.

Impeccable Cash Flows protect Business Partnerships.

Suppliers pay close attention to the ability of small businesses in making timely payments. Non –payment of funds to suppliers at crucial junctions of the business cycle can lead to loss of trust among small businesses and suppliers. It is highly essential to conduct a forensic financial audit to streamline all existing cash flows. This is done so that a wider range of bills and invoices do not go dishonoured for want of funds.

Cash Flow helps small businesses to expand at the opportune time

Enhancing your business portfolio into new market frontiers is an exciting prospect. It generally means the business products are ready to make a foray into new geographical markets and varied customer bases. This also means that new business plans have to be formulated to ensured business continuity and sustainability. 

  • Cash flow directly determines the growth factor of the small business. Renting buildings and purchasing stocks can be a heavy financial burden for any small business. 
  • At the same time, new hires and technology requirements can overburden the company’s existing financial position. All these infrastructural requirements need huge capital outlays. Hence it is essential that when entrepreneurs venture to apply for a business loan in reputed financial organisations. 
  • It is very important to present a solid framework of cash flows to make sure that your capital funding is in direct synchronisation with the business expansion plans.
  • Recent surveys indicate that more than 80 per cent of businesses go bankrupt due to the presence of unstructured cash flows.

Robust Documentation for Small Businesses is the key to favourable business outcomes

Business owners are always overwhelmed by the record of receipts that need to be preserved for financial accounting. This paperwork is the crucial point when the taxation time arrives. These documents are vital when the time arrives to make deduction calculation on the tax that needs to be paid by the small businesses. 

  • Documentation is necessary to save the company from adverse regulatory remarks from a third-party audit. This also helps in protecting the company’s stock prices and keep up the positive momentum associated with the brand.
  • Business owners need to prepare flawless documentation to maintain a perfect record of regulatory approvals, permits, authorisations, and financial transactions. 
  • This is particularly true in the case of business loan applications for MSME industries. Small and medium enterprises should maintain proper documents for the financial lenders to inspect and form a balanced judgment into their manufacturing operations.

Bank statement for the last three years

Bank statements are the legal indicators of proof of a company’s profitability. The revenue generation records can be effectively derived from having a forensic audit of the bank statements. The future profit amounts can also be calculated using bank statements, thereby improving the chances of sanctioning the business loan applications.

Invoices Documentation

All invoice pertaining to payable and receivable categories are important to show a chain of custody among contractors, suppliers and product vendors. This can help indicate the quantum of goods and services produced in a financial year.

Profit and loss statements are the crucial indicators for stabilising the financial health of small businesses, and these are under special scrutiny when determining the favourability of your business loan application. The invoices of all good and services rendered and accepted needs to be audited by external professionals. A few examples of such important documentation scenarios for small business owners are:

  • Invoices from spare part manufacturers who are offering their products to the small business
  • Annual invoice for the entire financial turnover that is to be kept both in company records and a soft copy in the main server of the company’s website
  • Monthly invoices from repeated vendors
  • Invoices sent to the client when the product is purchased over the company’s website.

Optimal CIBIL Score is mandatory for the success of a small business

CIBIL score is the barometer of the excellent financial health of the organisation. Good credit enables you to access massive cash flows needed for operations expansion, manage the day-to-day expenditure, acquire inventory, and go for employee expansion.


CIBIL Score Range Indications for Small Businesses

A good CIBIL score will be in the upwards of 750, and this is the precursor for getting a huge amount of loan at competitive interest rates. A good credit score is important or the following reasons:

Energises the Borrowing process

When the small business applies for a business loan, an ideal CIBIL score enhances the approval chances and increases the approval rate. It generates a sacred identify for the small business in the lending institutions’ judging eyes and places your application on top of the food chain.

Guarantees sanction of an increased loan amount

A big credit score makes sure that the small business has the required capital level to straighten out cash flow issues, factory space leasing or acquiring state of the art software that are important to remain viable in the current cut-throat small business retail markets.

Applying for a business loan successfully

Small businesses apply for a business loan when they need it the most to survive firms’ monopoly competition with large pockets. MSME loans are available for disbursal from GoI, and there are a set of procedures that need to be followed by the small business to get successful approval for a business loan. 

Some Pointers for getting the small business loan sanctioned

  • Every banking institution operates in a different way when it comes to handing out credit facilities to small businesses. Though the majority of the big lending institutions cater to major clients’ needs, there also might be a willingness to finance the capital needs of the small business when they are satisfied with the future profitability of the business.
  • The small business loan application should look endearing to the managers of the financial institutions. The entrepreneurs must be of sound educational calibre as this will go a long way in trusting the business’s future efficiency. 
  • Banking organisations have specialised credit cells to meet the needs of small businesses. IT is important to understand these banks’ specialised processes by making a detailed study of the loan brochures and getting educated on the different aspects of loan sanctioning and disbursal.

Top organisations respect individual entrepreneurs’ financial discipline as this casts a shadow on their running of the business. Transparency in maintaining documents is vital to establish trust in banking lenders. The application processes are of high calibre, and small businesses needs to put their house in order before opening their books to the massive, detailed scrutiny of financial organisations. This is vital as a loan application rejected will be recorded with red ink in your credit history, and the name of the rejecting organisation will be displayed too. Other lenders may not look at your business loan application favorably when they find that your business has been rejected for a loan by big financial organisations.

Strong Business Structure

Having a reinforced business structure is very important to make sure that your business is running in an ideal way. The lenders will have a general look at the structure of the business, its articles of incorporation and various other business practices when they decide on the viability of business loan applications.

The strong foundation of the business structure should be reflected in the business continuity plan. Preparation of a good succession and emergency business plan will qualify your small business for a faster and enhanced loan amount suitable to the business sector’s requirements. 

Different financial institutions have different wants when judging the management structure. Small businesses with CEO and CFO are more inclined to get their loan sanctioned due to the presence of duty delegation.

Small business loan applications have a higher chance of getting approved when the above financial habits are followed by management and entrepreneurs. The business loan process can certainly be an arduous affair, but in no estimate should it be a nightmare. Due to the recent government focus on the provision of credit to small businesses, the regulations are watered down, and there is a huge supply of cheap credit for small business owners. Cash flow statements, CIBIL scores, proper business loan applications, and transparent documentation are the key to achieving the financial discipline expected from small businesses seeking a successful business loan approval.