Every small business owner wants to expand its venture to compete with the big businesses of the industry. However, only a few of them make through because they succeed to raise funds for their business at the right time. While the loss in the business or failure of the business depends on several other factors, the shortage of the fund is one of the key factors in the loss of business. During its life, every business needs external funding; without outside capital for a long time, your business may miss the market opportunities.
Raising money from investors can be a challenging affair for small businesses. However, small businesses can explore other options, such as business loans and P2P loans, to get funds. But there are fixed prerequisites that must be met prior to getting a business loan in India. Generally, small enterprises are not sure about their eligibility for a business loan and hence don’t try for the same. If you’re also confused about whether your small business will be eligible for a business loan or not, here you will find out about your eligibility.
Here are the important factors that you need to consider to apply for business loans
1.Credit score
Credit score is one of the most important factors considered by the lenders while assessing a business loan application. For small business enterprises, thinking about a business loan that too at a high rate of interest can be a risky choice. However, borrowers with a good credit score can get business loans at lower interest rates. If you are searching for a business loan in India, you should be mindful that you have a good credit score while applying for a business loan. Typically, a CIBIL score 750+ is considered a good credit score to secure a business loan in India.
2. Cash flow and income
Positive cash flow is very important for every business. Regular and healthy cash flow is the manifestation of the capacity of a business to repay the loan. In other words, cash flow is a manifestation of your business’s health. Apart from the good cash flow, lenders also check income to determine how profitable your business is. However, if your venture is relatively new without a good amount of cash flow, then you can apply for a personal loan for the expansion of your business.
3. Age of business
Many businesses struggle in the initial stages and shut down. So that’s the obvious reason banks and other financial institutions typically require a business to be operational for a minimum of 2-3 years to be eligible for a business loan in Delhi. As a business loan borrower, remember that the lender doesn’t look for the registration date of the business, instead, it checks how long a venture has a business account. Normally a minimum of 3 years of business history is required to get approval from traditional lenders in India. However, businesses that have been operational for less than 2 years can also qualify for a business loan in Delhi from multiple lenders, especially NBFCs.
4. Current amount of debt
When you apply for a business loan, lenders check your FOIR (fixed obligation to income ratio) also known as a debt-to-income ratio to assess the percentage of your debt payments against your gross income per month. Business loan applicants are expected to keep the debt-to-income ratio below 50%.
Apart from the fixed obligation to income ratio, lenders also check the balance sheet of the business to assess the financial health of the business. The balance sheet is a basic document summarizing your business’s financial status, which includes assets, liabilities, and equity. Ideally, total assets should be equal to the sum of your liabilities and equity accounts.
The lender also checks the borrower’s credit utilization ratio. By looking at credit utilization ratio, the lender evaluates credit hungriness of a borrower. The credit utilization ratio is the used amount of the credit available on the borrower’s credit card. If your credit utilization ratio is below 30%, the lenders may approve your application for business loans in Delhi. Whereas, if your credit utilization ratio is above 30%, you need to lower it down and then apply for a business loan in India. Otherwise, the loan application may get rejected by the lender.
5.Collateral
There are two types of business loans – secured business loans and unsecured business loans. Borrowers need to fulfil the above described criteria to get secured business loans in India. Borrowers need to submit assets like gold, papers of residential or commercial property to the lenders to get secured business loan in Delhi. Secured business loans usually have lower interest rates. However, small business owners may not have collateral or they may not wish to risk their assets to get business loans. In such situations, they can get collateral-free business loans by fulfilling the eligibility criteria set by lenders. There are dozens of business loan providers in the market and eligibility criteria vary from lender to lender. Borrowers should check the eligibility criteria of multiple lenders and apply with the lender whose criteria you meet.
Conclusion
Getting a business loan in India to support a small business is simple and fast these days. However, if you are applying for a business loan for the first time, then you should be careful to look at a combination of factors that lenders look at before they process a business loan. If you want to raise funding in the form of a business loan, make sure you have a good CIBIL score, FOIR, and credit utilization ratio. If everything is ok, lenders can offer you unsecured business loans. If you can afford to get a secured business loan, you need to provide any asset to the bank as collateral. Though a secured loan involves a risk of losing assets, it helps you get a cheaper business loan in India. Apart from these factors, traditional lenders also check the turnover, age, and profit of the business. Hence, by providing an audited financial report of your business, every small business can qualify for a business loan easily.