There is a golden rule in business for loan borrowers, “Never do business with your own money alone.” What does this statement signify? You do not need a financial expert to deduce that loans form an important portfolio of the balance sheets of every business concern (big or small) in India.
Now, you have the question as to what lenders look for in business loan borrowers. This is where the 5 C’s of credit come into the equation. Let us see what these 5 C’s are that the loan borrowers should be aware of.
Some people refer to this important ‘C’ as Credit History. Every business loan borrower India should know that his credit history is one of the most important factors that lenders look for in loan borrowers. You have organizations like CIBIL (India) that determine the credit history of the loan borrowers. Every lending institution in India is a member of CIBIL (India). They are mandated to share the credit history of each of their loan borrowers. Based on their credit behaviour (repayment history), CIBIL (India) evaluates their ratings by giving points ranging from usually 300 to 850. The better the repayment history of the loan borrowers, the higher are the points. Hence, the chances of approval of the loan are also higher.
When lenders evaluate loan applications, the capacity of the borrowers to repay the loan becomes an important factor. The loan borrowers may have an impeccable credit history but if they lack the capacity to generate income from their business, they would not be able to repay the loan. This is where the business loan borrowing calculator comes into effect. The important points lenders consider are the recurring liabilities, the debt to income ratio, and the stability of income generation, etc.
In very simple terms, capital is the borrower’s contribution/investment in the business. Lenders finance businesses but insist that the borrower has a stake in it as well. The debt-equity ratio is a very important one while evaluating the loan proposals. The accepted ratio is 4:1. Banks in India also refer to it as ‘margin’. It is a common belief that the business performs well when the borrower has a stake in it.
Collateral in the case of loan borrowers:
There are different types of business loans in India. You have unsecured loans as well as loans that have the backing of adequate collateral. This collateral can be in the form of property, fixed deposits, LIC policies, and so on. Collateral is an assurance to the lender that he has something to fall back on in case of default by the loan borrowers.
One of the most important rights of borrowers in India is transparency in dealings with the lenders. He has a right to know the conditions under which the lenders extend financial assistance. These conditions constitute rate of interest, repayment schedules, moratorium period, submission of statements, and registration of charges and so on.
These are the 5 C’s that lenders look for in loan borrowers. They evaluate each of the C’s before giving their decision ‘Loan application approved’ or ‘Loan application rejected’. Now, that you know what lenders expect loan borrowers should have, it should not be difficult for businesses to weave their strategy around these 5 C’s.
Read more on “What is an Unsecured Business Loan“.