Access to financing remains one of the biggest challenges faced by MSMEs and entrepreneurs in India. However, securing a business loan pre-approval can ease some of this burden for small business owners by confirming the availability of funding upfront.
As per an IFC report, the estimated credit gap for MSMEs in India stands at Rs 33 trillion
as of 2023. To bridge this gap, customised financial solutions are the need of the hour from lenders. This is where a pre-approved business loan can make the process more streamlined for both financers and applicants.
Let’s understand what is a pre-approved business loan, what it entails and effective tips to increase your chances of securing one.
What is a Pre-approved Business Loan?
A pre-approved business loan refers to conditional loan offers made to potential borrowers based on preliminary due diligence of their financial health and repayment capabilities by lending institutions.
Unlike pre-qualification which gives non-binding estimates, a pre-approval holds more weight as it signifies the lender’s confidence in funding the loan once standard paperwork is completed. A pre-approval business loan helps entrepreneurs confirm the availability of capital even before formally applying or paying processing fees.
Tips to Increase Your Chances To Avail a Small Business Loan
Follow these essential tips to increase your chances of getting a pre-approved small business loan:
1. Assessing Financial Health
| As per Experian data, over 70% of lenders view credit scores above 750 as the lowest risk. Hence maintaining high personal or business credit scores above this threshold greatly enhances loan approval odds. |
| Additionally, minimizing further borrowing in case of already high credit utilization levels (over 30%) would contain risk perception. Avoid applying for multiple credit lines in parallel. |
| Thoroughly analyze past personal and business financial statements in detail to red-flag any weaknesses such as frequent losses, cash flow issues, high debt levels etc. Mitigate identified issues proactively through revival strategies. |
| Also, ensure financial records are well-documented and updated to accurately represent current business health. Maintaining robust audited statements cuts delays by enabling quicker verification. |
2. Crafting a Convincing Business Plan
Also Read:- How to write a startup business plan
| Financials :- Provide realistic budgets, cost projections and forecasts grounded in substantiated assumptions, market research data etc to depict accuracy. Benchmark expense components against industry averages. Model different funding scenarios with sensitivity analysis to showcase thoroughness. |
| Market Prospects :- Highlight current and emerging demand trends, gaps in competition and sustainable strategies formulated to capitalize on these through differentiated offerings. Share actionable plans for geographic, product/service expansion to depict growth roadmap. Provide evidence like pilot testing results. |
| Management Profile :- Demonstrate relevant domain experience and entrepreneurial capabilities by profiling founders and leadership strengths to depict operational excellence in running the business. |
| Collateral Options to Consider :- Per SIDBI data, loans above ₹10 lakh may necessitate hard collaterals. Evaluating assets to pledge can better eligibility odds and negotiations. |
| Liquid Assets Fixed deposits, listed stocks and mutual funds help secure lower interest rates and faster processing. |
| Physical Assets Property, equipment etc though highly valued can have lengthy foreclosure processes. |
3. Building Lasting Lender Relationships
| Responsiveness :- Prompt clarifications via emails and calls regarding application status or new requirements establish reliability. Be available to resolve queries. |
| Transparency :- Candidly share accurate paperwork and financial data rather than just projecting the positive picture. Demonstrates genuineness. |
| Proactiveness :- Raise doubts yourself for clarity. Offer ideas and solutions to build understanding. This showcases confidence in working through challenges. |
| Professionalism :- Invest time to learn about optimizing loan applications. Seek advisors to demonstrate intent on getting things right the first time. |
4. Demonstrating Business Stability
| Operating History :- Highlight past successes, expertise and longevity through case studies, milestone achievements, testimonials etc. to signify the ability to sustain operations through varying business cycles. Share evidence of recovering well from external shocks like pandemic disruptions or market downturns earlier. |
| Customer & Employee Retention :- Healthy customer retention rates and employee tenures signal robust and well-managed processes. Low attrition indicates excellent service levels and engagement across stakeholders. Share data benchmarked positively against competitors. Provide testimonials. |
| Industry Standing :- Memberships and accreditations from reputed trade bodies signal wider peer recognition. Also, highlight clientele consisting of marquee industry names. Participation in forums and events demonstrates active involvement in staying updated with sector best practices. |
| Technology Adoption:- Digital presence through well-designed websites and social media handles portrays modern and optimized processes beyond offline-only players. Integration of automation, AI-based solutions etc further helps efficiently manage scale. Share tech stack specifics. |
5. Fortifying Financial Controls
| Cash Flow Management :- Adopt digital tools to tightly integrate collections, payments, accounting, and reconciliations and streamline the overall cash lifecycle. Maintaining optimal float funds ensures stability. Share cash runway viability to depict thoroughness in modelling worst-case scenarios. |
| Cost Optimization :- Renegotiating rentals, inventory costs, fouling favorable advance credit terms with suppliers etc improves profit margins. Discontinue avoidable expenses. Undertake rigorous annual expense audits across heads to prune redundant budgets judiciously without compromising growth. |
| Revenue Diversification :- Explore additional revenue models through tie-ups, and partnerships leveraging existing customer base to reduce over-dependence on one product/service for income. Offer bundled packages/membership models providing well-rounded solutions to drive higher lifetime value. |
6. Foolproof Application Submission
| No Documentation Gaps Furnish all prerequisite paperwork like KYC documents, supportive third-party research reports etc well in advance of final submission to avoid delays or complex back-and-forth. |
| Check Details Carefully Carefully reviewing all important information helps prevent mistakes that lead to delays later on. |
| Get Help from Experts Input from specialists makes tough applications easier to handle. Their guidance and expertise smooth the process. |
| Highlight Special Strengths Point out unique attributes like patents and top certifications that make us stand out. This shows we are a smart choice. |
7. Sharpening Negotiation Strategies
| Comprehensive Market Research Understanding prevailing rates, trends over recent quarters and key parameters gives us a valuable edge at the bargaining table. Going in well-informed pays off. |
| Establishing Credibility with Non-Negotiables Identifying 2-3 non-negotiable priorities and refusing to compromise on them, even if it means walking away, establishes credibility. Signaling we stand firm on certain must-have terms demonstrates commitment and earns respect. |
| Preparing Trade-offs Demonstrate understanding of give-and-take dynamics by preparing 7-8 specific term sheet trade-offs with rationale grounded in financial/operational impact. This projects confidence and clarity greatly. |
Financial Education and Advisory Support
Invest in monetary training and seek guidance to improve your understanding of economic matters. Collaborate with financial specialists, accountants, or consultants to strengthen your monetary acumen.
Demonstrating a dedication to ongoing financial learning and seeking expert recommendations showcases a proactive method to handling your enterprise’s economic fitness. Lenders admire corporations which are well-informed and make knowledgeable financial decisions, which could definitely impact your eligibility for a pre-accredited small business loan.
Incorporating these extra strategies into your financial plans can similarly grow your chances of securing a pre-approved business loan. Each of these avenues contributes to the general financial power, adaptability, and credibility of your enterprise, making it an extra attractive prospect for creditors supplying pre-approvals.
In Closing
In conclusion, entrepreneurs who opt for meticulous planning and thorough instruction, as mentioned, stand to gain good-sized benefits in the form of a pre-approval private business loan from lenders. This certainty of investment not only instils confidence in the business but also provides an important runway for scaling operations seamlessly.
By following these massive steps, you could drastically enhance your possibilities of availing a pre-accredited business loan and improve your enterprise for future growth.