Are you applying for a business loan? You should definitely follow a few tips which ensure success as far as getting funding for your blueprint or business plan is concerned. Submitting your very first business loan proposal can be a hugely daunting affair with the gazillions of financial documents required along with a thorough scrutiny of your personal and business credit history as well. Here are five tips that will help you get your application successfully approved without any hitches.
You should know that any bank or financial institution will first want to analyze your credit scores both at a personal and business level. The business owner’s own credibility is a major factor for disbursing a loan. This is because most startups and other young businesses do not quite possess ample credit histories of their own.
As a result, the personal credit score becomes a determining factor for any lender. You should always get hold of your updated credit score so that you have an idea of what to expect. Any score above 700 will be excellent while you will still get abundant options in case it is above 620. Anything below 600 and you are not guaranteed chances of success in obtaining a business loan as per your needs.
Tip 2- Always have your financial documents ready
When it comes to preparing your financial documents, you should be on it well in advance. This procedure will be tedious and time consuming unless you have always kept everything updated. You should get the following documents ready:
- Legal documents related to the licensing and setting up of your company
- Bank statements for at least a month
- Business and personal tax returns for the last two years
- Company balance sheet
- Profit and loss revenue statements for 1-2 years
- Statement of cash flow
These documents will be indicative of your present financial position and ability to repay the loan that you are applying for. Make sure that the documents are absolutely accurate since banks or financial institutions will verify these against your tax returns and bank statements. In case there are any discrepancies, your loan application will bite the dust.
Tip 3- Have your business plan in place
Always get your business plan ready and written down while applying for a business loan. Not every bank or financial institution wants to see a proper business blueprint. However, you should always get this prepared in advance since it enables swifter approvals or your loan. You should always include a brief overview of your business, your journey so far, organizational information and structure, services and products offered, revenue history, your competitors, market trends and also how you intend to create your own niche in the market. The most important thing is your future vision and business blueprint. Make sure to mention how you will use the funds applied for.
Tip 4- Make sure you apply for a suitable loan
You should know that a successful business loan application also depends on the type of loan scheme or product that you are choosing. Always think carefully whether you would approve this type of loan for your company. In case you have a credit score that is below the desired mark, try and ferret out any other loan type that might help you including loan schemes which come without collateral requirements, equipment based funding and more. Never apply for a huge amount of capital which you are unsure about being able to afford.
Tip 5- Never be in a hurry
This is probably the most important tip that you should absorb. Always take as much time as required while preparing your business loan application. Seek out suitable loan schemes, check and prepare your documents and whip up a good application.
If you are thoroughly prepared and have all the documents to match, your chances of getting your business loan approved are sky high. Starting a business can be a real struggle, but it can also be a rewarding and satisfying experience. Though many businesses battle to make a profit, many don’t even get past the planning stage. Rejection is something none of us want to face, but if you are a small business owner you’re probably quite familiar with the feeling.
According to a study conducted by the RBI, from March 2007 and 2013, bank credit grew at a Compound Annual Growth Rate (CAGR) of 21.4% and NBFCs saw a credit growth of 24.3%. At the same time, non-performing assets (NPAs) or bad loans have increased by 320.50% from Rs. 39,000 crores in 2007 to Rs. 1,64,000 crore in 2013. Therefore, it’s not surprising that lenders have become more cautious about approving loans. Banks will analyse each detail of your application and even a single discrepancy can lead to your loan being rejected.
Major Reasons for a Business Loan Rejection:
Bad Credit Score: Your credit score is used to measure your creditworthiness, and banks and other lenders will take it into consideration while granting a business loan. A meager credit score is seen as a sign that you don’t priorities paying your debts. When it comes to a business loan, lenders will analyse your personal and professional credit scores to set interest rates and make other lending decisions. Even you if you unintentionally miss a payment on your credit card, home loan, or any other debt, it will be regarded as a strike against you by lenders. One of the best tips to avoid business loan rejection is to improve your credit score before you apply for a loan by making your business payments on time, keeping your credit accounts open, and spending less than your credit limit.
Flow Issues: Cash flow refers to the money that a business brings in and spends during a certain period of time. The one thing all businesses aim for is to make money. So, when you apply for a loan, banks want assurances that your business has a sufficient flow of income to pay off the monthly installment, in addition to making payments to cover the rent, pay the employees, and meet other costs.
Even if a company makes large profits, they struggle to keep money in the bank, as most of them pay third-party suppliers before they get charged for their service or product. This is a major reason why you might end up receiving that dreaded business loan rejection letter.As a business owner, it is imperative for you to keep an eye your income. If you find that your expenditures outweigh your income, then you will need to change the way you run your business.
Deficiency of Collateral: Lenders often require collateral to provide a loan. This is usually a physical property that will be possessed if the loan is not repaid. Some examples of objects used as collateral are vehicles, business equipment, or a house. One of the biggest reasons why business loans get rejected is because a company has little or no financial records. The less you have to show the bank, the more collateral they will require. However, a lot of businesses, especially the new ones, don’t have enough collateral to support the size of the loans that they require.
Lack of Preparation: Failing to prepare is one of the most important reasons for a business loan rejection. Some business loans are rejected solely because the borrower isn’t prepared enough. Before applying for a loan, make sure that you have a complete business plan framed. Ensure that you attach financial statements, projections, tax returns, bank statements, and your personal and business credit reports. Also, attach copies of legal documents like the articles of incorporation, leases, licenses, contracts, and permits that you need before you start to operate.
Facing Difficult Situations: Even if your business runs smoothly, has good credit, and offers excellent collateral, there is a chance that you might face some difficulties while applying for a loan. For example, a lender will think twice before providing a loan to an agriculture-based business when there is a drought or famine in the country. It’s quite simple – if your business is finding it hard to make a profit, then it would be equally hard to repay a loan. This is why banks consider all kinds of factors before making their final decision.
If you are wondering how to overcome business loan rejections, remember to avoid making the mistakes listed above. Not every business needs a bank loan to take off, but for the majority that do, it’s important to get it right.
Business Loan interest is the compensation a borrower has to pay the lender for spending the loan, excluding the principal amount. If you borrow money from the bank you’ll have to return the entire sum after a certain period of time, along with a tariff (interest), which is charged at a certain rate.
When you start a business, there are always expenses to consider to generate revenue. Such expenses can be deducted from your company’s income in advance before tax is levied. Your gross tax expense liability will be reduced when these expenses are subtracted from your taxable income.
You might wonder—‘is business loan interest tax deductible in India?’
Of course! The Indian Government permits tax deductions on business loans. However, these deductions aren’t valid for the principal amount, only the interest.
Here’s how it works:
The Process Behind the Deduction
The reason why there aren’t any deductions on the principal amount is because it’s never your money to begin with. When you approach a bank for a loan, the money you receive is not your income. You will, therefore, have to return the entire loan amount because the money was not yours in the first place.
The interest is another ball game altogether. You can think of it as the money that you pay from your earnings as a service charge for utilising the loan for your business. And you know that whatever you pay from your income is taxable. Hence, the interest that came out of your pocket is considered tax deductible.
However, you must also actually spend your money. You can’t ask for a deduction if you don’t use the money you received from the loan, or use it for personal purchases. The expenses have to be business-related for the deduction to actually work. And yes, if you have used a business credit card for a purchase, your credit card bill is tax deductible as well.
Here’s an example of a business loan interest tax deduction to help you understand it better: let’s say you borrowed INR 1 lakh from the bank with an interest rate of 5% per annum to pay for your business needs such as paying employee salaries, purchasing office supplies, and other utilities. The annual interest expense—5% of INR 1 lakh in this case—adds up to INR 5000, which will be deducted from tax payments as a business expense.
Tax Deductions on Business Loan Interests for Small Businesses
Business expenses that you might incur if you take a small business loan are also tax deductible. You must, therefore, take full advantage of this situation. Just make sure you document every single purchase that you make for your company. Take a look at the expenses below which you need to document for a small business loan interest tax deduction:
- Office Supplies
These include the money you pay for the paper, ink cartridges for printers, paper clips, pens, etc.
- Transportation Expenses
If you’ve purchased an automobile for yourself and for the use of your employees, it will be considered a deduction of a capital expense. Fuel expenses, maintenance charges, and car insurance will all be deductible. The amount will depend on the use of the car for work-related activities. If the deductible amount accumulated is 50% of the mileage, you can write-off the other half for maintenance, repairs, and insurance.
- Advertisement Expenses
Expenses incurred while promoting your business, such a printing banners, visiting cards, brochures, television and radio advertisements, also fall under business loan expenses.
- Legal and Professional Fees
If you’ve spent money on consulting with attorneys, accountants, and financial advisors for your business, then it will be deductible for the year that you incurred the expenses.
- Furniture and Equipment Expenses
If you’ve bought furniture or equipment such as computers, laptops, and printers, the expenses can be deducted in the year that they’re purchased or depreciated.
- Business Hospitality Expenses
If you entertain clients or prospective clients, you can deduct as much as 50 percent on airfare, accommodations, fuel costs, taxis, parking, dry cleaning and other expenses related to business hospitality.
You can also take a personal loan for business needs instead of opting for a business loan. You’ll still be eligible for deductions on the interest for such loans. Follow the guidelines below on how to deduct interest on personal loans for business:
- The interest for most personal loans and credit cards is non-deductible unless tax law allows it. If you take a personal loan for business purposes, the interest will be deducted from your earnings while you’re filing your tax returns. However, to avail of the deductions, you must be the individual responsible for the repayment of the loan.
- If you plan to utilise the loan amount for your business and personal agendas, maintain a segregation of the expenses for both cases. You will only get a deduction if the money you spent fulfils the ‘business expense’ criteria.
- Segregation of the interest you have to pay for a loan amount, which you want to spend on personal purposes and business need, is also important. Let’s say you take a loan of INR 40,000 and buy a television for INR 30,000, and invest the remainder as rent for your office space. If the interest you paid was INR 800 for an entire year, only INR 200 (INR 10,000 / INR 40,000) i.e., 25% would be considered as deductible interest for this business expense.
- Sometimes, it’s worth capitalizing on the interest on the loan funds used for business expenses rather than deducting, which means you’ll have to include it in the cost of the property you purchase with the loan funds. You will still benefit on the interest when the property is sold as you’ll have less profit to report on your taxes. Capitalization of interest is required when your company creates something used by your business and is eventually sold to customers. For example, if you invest the loan amount to purchase raw materials to manufacture consumer goods, the interest on the loan funds become part of your inventory costs.
If it’s a business loan or any kind of loan you’re considering to fund your business expenses, you won’t have to worry as both options provide deductions on tax interest. Just have a great business plan, solid paperwork, and always consult a financial guru before committing to a course of action.
Author Bio:- Arwind Sharma is a financial advisor with an experience of more than 7 years. He has worked for topmost financial firms in India and has been a visiting faculty at many reputed institutes in India. Currently based in Pune, Arwind Sharma is a name to reckon with when it comes to financial management for big brands. A post-graduate in business economics, he is an alumni of Princeton University, USA. During his free time, Arwind teaches children from marginalised sections of society and also work on his blog.