While almost any business can face financial difficulties, small and medium-sized operations are more prone to periods of low sales and profits. This is largely down to having lower cash reserves, fewer assets, and a lack of access to unsecured credit. Getting a business loan during such times can be a great option for keeping things steady till the tides turn back favorably. However, businesses still need to show a profit for getting these loans approved.
For a business undergoing financial difficulty, showing adequate profit and getting approval can be challenging.  But it isn’t impossible. Finance for companies with low sales comes in many forms and you can see how getting business loans is indeed possible with low profits. Read on.
Why Are Business Profits So Crucial for Loan Providers?
A business’s profit and cash flow are one of the most important factors that lending institutions consider while evaluating business loan applications. A negative cash flow indicates more expenses are being incurred than profit generated, which raises different sorts of challenges for business owners. When a business generates negative revenue, burdening it with added debt becomes even riskier. Offering business finances always involves risk for the loan provider, which becomes greater when the borrower has low profits.
While other eligibility factors are also crucial in determining an applicant’s eligibility, negative cash flow makes lending institutions more hesitant. That is why they look for a positive cash flow while evaluating loan applications to ensure repayment of the loan amount.
Important Points to Consider While Taking a Business Loan With Low Profits
Small businesses with low profitability may need to consider some factors and try to look for SME/MSME loans. Owners should be fully aware of their business’s financial health and ascertain how a loan stands to help them. However, borrowers must also consider a few things before applying for business funding:
- Profit Generation After Taking a Loan: Although it might seem obvious, many aspiring borrowers looking for finance forego this crucial step altogether. If the business is running and the owners are expecting payments from clients, taking this point into account will provide some clarity regarding future profit generation. Besides, financial institutions and NBFCs feel more confident in offering loans if they know profit is poised to come in.
- Cost-Cutting: Running lean operations is common for small and medium-sized businesses. With this philosophy, owners run their businesses with only the bare minimum while maintaining efficiency. Aspiring borrowers must identify areas where they can further cut costs and boost profits.
- Waiting Time: Time and time again, business owners simply cannot wait before acting in a low-profit situation. However, if they can wait, they get perfect opportunities to generate sales, receive pending client payments, and improve their credit scores. Sometimes, reducing the business momentum can prove more profitable than just focusing on productivity.
The Best Type of Funding Option for Businesses with Low Sales
Acquiring a business loan presents different challenges for businesses earning low profits, even if they have maintained a stellar credit history. Insufficient cash flow makes most loan companies reject loan applications. Businesses facing periods of low sales have lower chances of getting the loan approved. For most lending institutions, a certain amount of revenue is essential, even for companies with good credit ratings, good cash flow, and several years of business vintage.
Most digital NBFCs offer Small business loans through easy application processes. These NBFCs offer short-term business loans that most traditional companies do not approve of. The added benefits include competitive interest rates and flexible repayment tenures. Most NBFCs offer suitable loan terms, even to companies with low profits. Reach out to a small business funding institution and apply for a MSME loan to repay in easy monthly installments.
Steps to Boost Loan Eligibility
Small businesses with low sales can boost their loan eligibility by following these crucial tips:
- Prepare Documentation: Even if the cash flow is low, having the business’s financial documents, bank statements, credit reports, etc., can save time and allow owners to access the best funding option without hassle. Other documents that may be required include the business owner’s identity and address proof, along with the proof of ownership.
- Show Credibility: Proving credibility to the lending institution makes them feel safe disbursing the loan to the applicant. Make a structured plan to repay the loan and choose a loan term with easily affordable EMIs.
- Take Time to Improve the Credit Score: If possible, take a few extra weeks to improve your credit score. It is an important parameter that lending companies check while determining the applicant’s loan eligibility. Furthermore, a good credit rating makes more loan options available with better terms.
When all’s said and done, it is the business owners who are responsible for keeping their businesses afloat and making them successful. Financial hardships, while they are unwanted, will not last forever. Businesses can successfully weather such storms by getting a business loan at the right time. Although they may find it challenging to get a loan with low sales, the tips mentioned here can make things a little easier and more accessible. Remember, improving credit score, reducing the DTI ratio, and taking necessary action to improve cash flow are ideal ways to get a good business loan.
