SME loans are meant to deliver funding for SME (small and medium-sized enterprises). The general business finance scenario is all about how diverse firms acquire SME loans. There are, in fact, five pivotal issues or factors that all lenders would be considering before processing an SME loan.
Credit history plays a pivotal role in getting you SME loans. Lenders are majorly interested in assessing and scrutinizing your business and personal credit situation. This is demonstrated in your credit report. Your credit score would be an important factor while applying for an SME loan. Before you start loan shopping, better send in a request for a credit report copy from all the prime reporting agencies like Experian, Equifax, and the TransUnion. Review your credit report with a lot of care and look for mistakes. In the event of a discrepancy resolve all issues before you initiate the application process. You must learn how to clean up your credit report or records.
SME loan applicants must necessarily have a substantial amount of equity that is invested in their business enterprises. Lenders need to be convinced that you would be working real hard and putting in your best efforts to make this business a success. When they are satisfied that you have also invested a reasonable amount out of your own pocket, they would be convinced about your motive. Moreover, strong equity and a substantial debt amount would be assisting a business in times of economic crises. No, or little equity would be leaving a business really vulnerable and then the risk of default becomes inevitable.
Working capital is supposed to be your current assets minus your current liabilities. It is more like cash on hand and what is actually available to you for paying your current debts and keeping your business functioning properly. If there is a shortfall in the working capital, there would be a risk of the business winding up. Lack of working capital could be a reason why lenders would not approve yourSME corp. loan.
Banks and financial institutions would be interested in examining your main two repayment sources: collateral and cash flow from the business venture. Lenders would be scrutinizing all your past financial statements including your partners’ financial status. They would be going through your liabilities and personal assets, personal tax returns & balance sheets for the last three years, profits & loss statements, etc. If your business has been making a profit consistently, your loan would be approved but if your business is going through ups and downs and the performance is erratic, you need to boost your chances of getting your loan approved by highlighting new opportunities, and talking about new contracts demonstrating that your business is certainly not a risky business and has potential to bring in profits in the near future.
The SMEs face a major deadlock when banks and most other financial institutions emphasize the need for collateral in the form of bank guarantees, cash or real estate. These are things that a budding businessman would seldom possess. Moreover, experience in the same line of business is very much compulsory, as far as, banks are concerned while approving loans. You must have managerial experience and business acumen in the very first place. Once you get the loan, you need to stay motivated and focused on coming up with a valuable, sustainable and bankable business.