It is rightly said that finance is the backbone of all businesses. These funds can be used as working capital, buy fixed assets, and equipment/machinery. Sometimes, a business owner faces capital crunch where he looks for other sources of funds as his personal funds are exhausted.
Availing a business loan at this point can be a very crucial step for all the business owners. A business owner thinks of availing it for several reasons, ranging from buying machinery and equipment to investing in working capital. Every business owner has different requirements. However, the amount of loan sanctioned depends on various factors. And to ensure that the lender sanctions the amount you require, you need to know these factors and work on them to ensure positive results.
Let’s now take a look at them:
It is very easy to get the business loan sanctioned if you have a positive and high credit score. The loan amount that you require can be easily approved if your credit score is within the threshold of the loan lender.
Notably, credit score depicts your creditworthiness numerically. It is an important and deciding factor that every lender takes into account before approving a loan. Besides, the credit score also plays a critical role in deciding the interest rate. If you have a low credit score, you would be a risky borrower. And thus, the lender would offer you a loan at a high-interest rate. Similarly, if you have a high credit score, you would be less risky, and the lender would be willing to offer you a low interest loan business loan.
The credit report includes total number and amount of loans taken, timely repayment of the loans, timely payment of all bills, and if the individual is capable of repaying debt.
The companies that evaluate and prepare a credit report include:
- TransUnion CIBIL
The credit score in India ranges between 300 and 900. Although the recommended range is 700 and above, many lenders also offer loans at 600 as well, especially NBFCs. If your credit score is 700 or more, you can get an even higher amount of loans approved. Notably, a low credit score would be a red flag for the lenders, and they would be unwilling to approve loans of your desired amount. These red flags include:
- Too many loans, be it any – personal loan, home loan, or education loan
- Defaulted cheques
- Loan defaults
- Consumer grievances
- Negative cash flow
- Lack of liquidity
The positive cash flow of your company would represent that your business has efficient cash inflows to manage all its expenditure. All lenders access the liquidity of the business before they decide to lend money.
Significantly, the positive cash flow is also another factor to determine the amount to be sanctioned as a business loan. Notably, positive cash flow can also be indicated because of inadequate raw material or finished product. However, this will be considered a negative cash flow by the loan lenders. Along with positive cash flow, the sales should always be increasing or steady.
A solid plan with a strong business model and accurate sales projection will reflect your capability to afford and repay a business loan. A sound business plan will show:
- Marketing strategy
- Lists of projects completed
- List of projects in the pipeline
- Sales channels
Business plan convinces the loan lenders on the aspects of future sales, profits, and that you have the ability to repay the debt with interest on time.
The points mentioned above will help you get your desired amount of loan approved with much ease.