The Role of Income and Asset Verification in Securing a Business Loan
Introduction
For an MSME/SME located in India, getting an MSME business loan is crucial for growth and expansion. However, the business loan application process often needs a lot of difficult paperwork and procedures which take a lot of time to complete, which includes verifying, showing proof of the income and assets owned, etc. While these steps are difficult, most of the main lending institutions like public banks have made them mandatory and a normal business owner will have no option but to follow along with these requirements due to the immediate need for finance to grow or help their business. Through this article, we will look into the significance of income and asset verification in securing a business loan for Indian MSMEs. We will also discover the ideal option for an MSME business owner as most of the readily available solutions are really not helpful for an MSME owner.
What is Verification of Income?
Income verification is the process of assessing a borrower’s financial stability and earning capacity. Mainstream lenders of business loans typically require proof of income to have an assurance of a business’s own ability to generate sufficient revenue in the near future to cover loan repayments on time. Some of the very Common documents used for income verification include:
- Income Tax Returns: These documents provide a comprehensive overview of a business’s income and expenses.
- Bank Statements: Bank statements can reveal the inflow and outflow of funds, indicating a business’s financial health.
- Profit and Loss Statements: These statements showcase a business’s revenue, expenses, and net profit over a specific period.
- Sales Invoices: Invoices can substantiate a business’s sales and revenue.
What is Verification of Assets?
Asset verification involves evaluating a borrower’s tangible and intangible possessions. This is the alternative for income which gives some sort of trust for the lender to give funds to the business needing it. This helps lenders assess the borrower’s financial worth and their ability to collateralize the loan. Common assets that may be verified include:
- Real Estate Assets: Business-owned properties like land, buildings, and commercial spaces, etc are a major asset type.
- Machinery and Equipment: Industrial or commercial machinery equipment used by the business that needs a loan.
- Inventory: Products or raw materials held by the business in their warehouse.
- Vehicles: Cars, trucks, or other vehicles owned by the business.
- Intellectual Property: Patents, trademarks, or copyrights are also considered as assets which could be held as collateral.
Why do Business Loan Lenders Need to Verify Income and Assets?
The Lenders need the income and asset verification to reduce the risk of lending and ensure the loan is repaid by the borrower. Here are some of the main reasons:
- Creditworthiness Assessment: Lenders would be at risk if they give out loans without properly verifying the borrower’s credit score/cibil score etc
- Risk Mitigation: A business should always reduce the risk involved and for a bank or lender uncertainty and economic downturns or industry-specific challenges should be mitigated.
- Collateral Assessment: As we know banks (public/private) rely on pledging collateral for security to provide financing support to their customers so they would need to do the necessary checks to safeguard their business. Only NBFCs provide collateral-free business loans.
- Financial Stability Evaluation: Income and asset verification provides insights into a business’s financial stability and its ability to withstand economic fluctuations.
Tips for Simplifying Income and Asset Verification for a Seamless Loan Application
- Gather Required Documents in Advance: Keep all the docs handy as soon as possible to avoid a delay in the application process.
- Maintain Accurate Records: Make sure the docs are accurate and there are no errors and complications in the data. The last thing you want is a delay caused due to verification struggles..
- Choose a Lender with a Simplified Application Process: Opt for lenders that offer online applications and minimal documentation requirements. NBFCs out there are well known for such features and would make it very easy to apply.
- Seek Professional Assistance: If you’re unsure about the verification process, consider consulting with a financial Consultant or even an accountant
- Be Transparent and Honest: Provide accurate and truthful information to avoid complications during the verification process.
Conclusion
By knowing the reasoning and need of these steps and preparing adequately, businesses can enhance their chances of securing the necessary funding for growth. By providing transparent and accurate information, businesses can build trust with lenders and facilitate a smoother loan approval process. But what about MSMEs in India who are not financially or asset-wise strong enough to be able to declare income and assets for verification? They need not worry as there is a section of institutions in India called NBFCs that are focused on solving the funding issues faced by MSMEs. They also are MSME friendly by providing unsecured business loans within a short span of time. There are NBFCs who can even do it in a single day.
