Finance is the lifeblood of every business. If a business owner wants to expand his operations or even ensure a smooth flow of processes, it is essential to infuse funds into the company at the right time.
Adequate capital is also required to be arranged to start a new business and later in the form of working capital. Such business requirements can be financed with the help of timely business loans offered by many banks and other financial institutions. However, several factors are considered before a business loan is sanctioned. Here are some of them.
Business plan:
A business owner looking to secure a business loan should have a proper plan regarding the future projections and the business’s goals. An attractive sales projection gives a clear idea to the lender about your repayment capacity. Additionally, it is good to have on paper details such as the amount of capital the business requires, the exact places where it is, and how it will be used. Your business plan should talk about details like the company’s vision, the purpose of the loan and a clear path to reach the goals you have in mind.
Collateral:
Availability of collateral is one crucial factor in deciding the approval and sanction of the business loan. A lot of small businesses cannot have access to funds because of a lack of collateral. Financial institutions are looking at ways to reduce their lending risk by asking business owners to keep collateral. If they fail to pay back the loan, the lender can simply sell off the collateral and acquire their money back. Some examples of collateral could be machinery and equipment, stock, or any other assets owned by the business.
Credit history:
A business owner’s credit history is an important parameter that can strongly influence the approval of a loan. Your ability to repay the loan is reflected by your credit history, which makes it easy for financial institutions to decide whether they can extend the loan to you or not.
A credit report covers aspects such as the amount of debt taken by the business owner, the repayment of the loan and the capability of paying back the loan. In India, a good credit score is 750 and above, which means if your credit score is above this range, you can easily have a higher loan amount approved. A credit report can also highlight red flags which can go against you, such as negative cash flows, bounced cheques, consumer complaints, loan defaults etc.
Age:
One of the crucial factors that decide the repayment potential of the borrower is his age. A business owner less than 25 years of age or more than 60 will find it challenging to find a lender. Banks and NBFCs also consider the age of the business before sanctioning a loan. Cash flow of the company, age of the business, statement of transactions and more such factors are also considered. Banks also offer attractive business loan interest rates if a business has some traction.
Conclusion:
The above factors provide a good idea about your business loan eligibility. You can also use a business loan EMI calculator to understand the exact amount of EMIs due on your loan. Managing your funds wisely and maintaining a good credit history makes it possible to secure a business loan without any hassles.