Fundings available to SMEs can lead to their success. It can be available through various sources such as crowdfunding, banks, NBFCs, angel investors, etc. Proper use of funding can consolidate your debt, provide capital flow to your business and has the potential to expand your existing business. In this article we will be discussing the parameters a bank/NBFC looks for to approve a business loan application.
Most of the business loans by banks are unsecured in nature. Hence to ensure complete repayment of the loan, banks check for certain things that decide the repayment capacity of the business and the owner as well. Generally, this consists of five Cs of credit history – capacity, collateral, capital, character, and conditions. If a business lacks in any of these areas, getting approved for a small business loan can be difficult.
For banks, good credit history is always on high priority for lending. If you or your business don’t have a good score, the chances of getting approved for a business loan becomes tough. Lenders are always concerned about their repayment and this is the reason they keep track of your personal and business credit score.
Generally, banks prefer to lend an individual whose personal credit score lies between 700 -750. A good credit score shows a good credit history and indicates strong money management skills like paying bills on-time. A CIBIL below 680 is a sign of your bad credit history and banks consider you as a potential risk in terms of repayment.
A business having low cash flow is considered again as a potential risk by the banks. A low cash flow may indicate that you’ll take care of your business expenses & costs first more than your credits.
Banks do check for the bank statement of the business account and the personal bank account statement of the business owner as well. Doing this gives a clear idea to lenders about the cash flow and income from the business.
However, the good thing in all this is that you can improve your cash flow(in case it is low) by doing a cash flow analysis of your business, setting goals, and having a well-defined payment policy for your business.
Providing Collateral Options
At the point when banks request a guarantee for secured lending, they are looking to limit the risk involved. To guarantee that the specific insurance gives fitting security, the moneylender will need to coordinate the kind of security with the credit being made.
The collateral can be anything such as a real estate property or costly equipment or machinery of your business.
The lenders want to ensure the complete repayment of the loan, and your ability to ensure this can be defined as your capacity.
When one applies for any kind of loan, they authorize the lender to check their credit history and bank statement and last year ITR to know your capacity. This helps a lender to evaluate your history of repayment for your previous or existing loans. The transactions made by you again indicate debits and credits you currently carry.
After checking all these, the lender calculates your debt to credit ratio to approve or reject a particular business loan application.
No business can exist without documents. You need documents to start, operate and expand your business all the time. Different lenders have different eligibility criteria to approve business loans, but among all documents required remains the same with most of them. Here is the list of few banks document requirements –
- Identity Proof: Driving License / PAN Card / Passport / Voters ID Card / Aadhaar Card. (anyone)
- Address Proof: Ration Card /Telephone Bill / Electricity Bill / Passport / Trade license / Lease agreement / Sales Tax certificate. (anyone)
- Income Proof: Bank Statement of the Last 6 months.
- Financial Documents: Last 2 Years ITR along with computation of Balance Sheet, Income & Profit & Loss a/c for the last 2 yrs.
- Proof of Business Continuation
- Business Ownership Proof: Other Mandatory Documents such as Sole Proprietorship Declaration, Certified true copy of Memorandum & Articles of Association, business license and contracts by the authorized body.
- Last 3 years audited financials.
Submitting these documents shows your business is legal and hence lenders find it safe to lend it to such bodies.