Are you planning to go to a bank to ask for a business loan to start your eCommerce business? Well, chances are they would want a formal proposal from you. Want to know everything about how to get business loans from a bank as a small business owner? Here’s a full guide.
Budding entrepreneurs may have a passion or hobby that has the potential of being converted into a commercially viable business over a period of time.
Before starting an eCommerce business, you should gather various information for your proposed online business by carrying out research/surveys. After that, your first step should be to prepare a written business plan which is commercially viable.
A well-documented business plan will have details like:
- Identification of business products/services
- Market potential
- Target audience
- Type of business entity
- Key team members
- Business location
- Estimated costs
- Sources and uses of funds
- Business viability
You would need this plan when you go to the bank to ask for that loan.
Related read: 5 Top business plan templates you need to get started
Requirements from the bank
A business loan proposal passes through the lens of six C’s viz, Character, Capacity, Capital, Condition, Collateral and Cash flow.
Here are the things that you will need to present to the banker:
1. Personal details and capabilities
Educational background/qualifications of promoters, their character, capacity, capabilities etc, family background, support from family if any, previous professional experience in the proposed business activity.
Your KYC-related documents/papers for the proprietor such as PAN, Aadhar Card etc will be scrutinised.
Your paper/documents in connection with business entity formation and registration /statutory compliances i.e. licences, permissions for the business such as Shop Act Registration, MSME Registration, FSSAI license, GST Registration etc.
In the case of an existing business that has applied for a loan for expansion of business activity, you will also need to provide documents that show your books and accounts, tax compliances etc.
3. CIBIL Score
The banker will also inquire about the applicant’s CIBIL score.
What is a CIBIL score?
The proprietor’s CIBIL score is an important factor that lenders look at while evaluating a loan application.
The CIBIL score is a three-digit numeric summary of the credit history of the applicant’s loan accounts or credit cards, and their payment status, as well as outstanding amounts’ day past dues etc., if any.
The CIBIL score reflects your creditworthiness, based on your borrowings and repayment history, as shared by lenders. It usually ranges from 300 to 900.
Generally, loans are sanctioned to applicants whose CIBIL score is greater than 750. Hence it is advisable always to pay dues on time. Late payments are viewed negatively by lenders.
Be prudent, do not use too much credit, and control your utilisation. Maintain a healthy credit mix of secured (like home loans and auto loans) and unsecured loans (like personal loans and credit cards). There is a negative implication of having too many unsecured loans.
4. Project report
A Project Report is a document which provides details on the overall picture of the proposed business. The project report gives an account of the project proposal to ascertain the prospects of the proposed business activity.
It contains data on the basis of which the project has been appraised and found feasible. It consists of information on economic, technical, financial, managerial and production aspects.
In other words, Project Report contains
- Detailed information about promoters and their background,
- Projected business performance (in the case of existing business their past two financial years’ business performance and the next three financial years’ projected performance & analysis thereof)
- Place of the proposed business (including Land and buildings if required)
- Details of business products offerings/services offerings and their target group of potential customers
- Manufacturing capacity per annum, manufacturing process
- Machinery & equipment along with their prices and specifications
- The requirements of raw materials, as well as power & water etc,
- Manpower needs, marketing strategies and the cost thereof
- Various projections/assumptions and presumptions made therein etc etc.,
In short, the project report includes the cost of the project and means of finance and an executive summary of the proposed business activity.
Preparing for the interview
During the interview of the budding entrepreneur, the banker may try to test your entrepreneurial mindset such as decision-making, communication and negotiation skills, man management, leading your team, risk-taking ability etc., as well as your achievements so far; if any.
During the interview, the banker will enquire about further details such as the applicant’s own capital, various sources and uses of funds, market and competition survey/information collected and your various strategies to defeat the competition etc.
On the basis of the project report and the given answers, the banker evaluates the viability of the proposed venture by ensuring compliance with the bank’s loan policy/guidelines.
The bank evaluates the business on important parameters like the Break Even Point (BEP), liquidity, solvency and profitability ratios etc
How will the bank decide to approve the business loan?
The banker while considering the business loan proposal, wants to become a major financial partner in the proposed/existing business.
Here are a few deciding factors for the banker to approve a business loan:
Quality of the project plan
Generally, a banker’s stake in the business ranges from 60% to 75%. After studying the Project report, he interviews the proposer of the business entity and vets the business proposal.
The banker will analyse the risks perceived in the venture by performing a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of the following aspects –
- Promoter and the business entity
- Proposed products/existing and proposed products for expansion
- Project Report
- Products & Place
- Past performance and future prospects
- Pay Back
The location of the business
After evaluating the suitability of the proposed place of business, and its proximity in relation to the target group of customers, the banker will examine whether the business premises are owned or rented.
In the case of rented premises, a Lease Agreement with the landlord with adequate tenor needs to be registered with an appropriate local governing authority.
Analyzing past performances and future prospects
In the case of an existing business, the banker will ascertain past and projected future performance & profitability of the venture by analysing the unit’s audited financial statements.
He will also evaluate the projected sales and profitability/cash flow projections and the assumptions made thereof.
He will ensure the adequacy of the working capital requirements as well as the term loan requirements of the venture.
Related read: Funding for small businesses: A short guide
Paying back the loan
The banker is always interested in evaluating & ensuring that the unit generates adequate Cash flow over a period and earns a good profit.
They need to ensure the loan is repaid promptly in time with interest through ‘Equated Monthly Installments’ (EMI).
The banker will also ask you for any other liabilities as well as any other sources of income. This is important to ensure that the loan given is an asset to the bank and it remains a standard performing asset in their books throughout its tenure.
The bank authorities will also carry out checks by referring to the Willful Defaulter’s List of RBI.
Create business funding proposals with deAsra Foundation
Recently deAsra foundation conducted an ‘Udyojak Melava’ (workshop) where the theme was Funding from banks.
Here are some expert opinions and insights they received from banking officials about successfully passing the interview:
- Introduce yourself and give references.
- Ensure that your references and credentials must be acceptable to the banker.
- Present your project in detail with confidence and answer queries raised with adequate documentary references
- Explain your needs and expectations
- Be ready to provide information, financial statements and details of collaterals
- Build a reputation that helps them believe you will pay back in time
- Even during pre-sanction visits to your shop/factory, provide complete information to satisfy the banker’s queries.
- Be open and do not hold back information that may help your banker advise you better.
This article has been written by a deAsra Foundation author – Mr Sudhir Gijare.
You can read more practical advice for micro and small business owners on Yashaswi Udyojak (released thrice a week).