You wish to expand your business but are falling short of funds. What is the first thought that comes to your mind as a solution? A business loan! An easy and quick way to receive funds for your business.
A loan can be a life-changer for small businesses. You can even opt for a mortgage loan against the property if you have no assets to put as collateral. Judicious use of the business loan can help consolidate your debt, give you more capital to invest, and thus expand. But is it that easy?
Of course no! The first step itself, which is borrowing a bank loan, is a big task. Why? Because if you want to borrow, you must meet the bank's lending criteria, which covers the five "C"s.
1. Collateral
2. Capacity
3. Character
4. Capital
5. Conditions
Let us have a look at what all does a bank look for in their borrowers!
Funding from other sources
There are various sources from where SMEs get funded. These include banks, NBFCs, crowdfunding and angel investors, among others. Proper use of these funds can help them repay the loans quickly and act as significant support for the business as well.
Most of the business loans are unsecured. So, the banks also look for these other factors which help to improve the repayment capacity of the borrowers.
Your credit history
Good credit history is among the topmost priorities of lenders. If your score or that of your business is not up to the mark, getting a loan might get tough. Thus, you should maintain a CIBIL above 680, which is considered a safe CIBIL score.
The regularity of your cash flow
A business with low cash flow is considered a potential risk for lending money. This is because it shows that you may use the money for sustaining your business expenses rather than investing in its growth.
Thus, you should maintain a regular cash flow in your business account. Timely analysis, setting goals and making a well-defined policy of payments might help.
Providing options for the collateral
Collateral is asked by the banks mainly to limit the risk involved in the lending process. Thus, you can put up securities against the loan that you will borrow. The collateral can be any real estate property or any expensive machinery as well. This will make the moneylender confident of the deal and help in the procedures further.
Repayment Capacity
Your ability to repay the loan in the specified time is known as your capacity. But how is it determined?
The lenders check your credit history, bank statements and ITR (majorly of the previous year) to know where you stand. They also calculate your debt to credit ratio before approving the loan.
Conclusion
Lenders look at quite a few things before they decide about lending the loan to you. Apart from all these, they also look for some necessary documents like identity proof, address proof, income proof, financial documents and others. So, before you choose for a business loan online apply, make sure that you have all the documents ready. Try to meet the above requirements for increasing chances of approval!
