As a small business owner, you may need to avail of a loan to meet the capital requirements. Financial institutions consider several factors before approving your loan application.
Here are 10 common factors considered by financial institutions while approving your loan.
When you apply for a business loan, you need to have adequate assets to offer as collateral. The value of the assets must be able to cover the loan amount to mitigate the risk of the lender.
2. Business plan
You must prepare a detailed plan that includes all aspects of your business. The lenders look for information like your product or service, financials, personnel, and market dynamics.
3. Financial details
The lenders will check all your details, such as previous debts, bank and investment accounts, and credit cards. You will also need to provide supporting documents like address proof, tax proof, and contact details.
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4. Accounts receivable
A complete breakdown of your debtors may also be required. The lenders may require an age-wise summary of the accounts receivable and sales and payment history before approving the loan.
5. Accounts payable
You may need to provide details about all your creditors. Furthermore, credit references may also be required.
6. Financial statements
Most lenders require financial statements for your business. These include the profit and loss account statement, balance sheet statement, and cash flow summaries. Lenders prefer audited financial statements for approving business loans in India.
7. Personal finances
Some lenders require details on your personal finances, such as your net worth, assets and liabilities, loans, investments, and credit cards. Financial institutions may ask you to act as a personal guarantor on your business loan application.
8. Insurance details
Since the functioning of your venture depends entirely on you, the lenders may ask for insurance protection in case of your sudden demise. This ensures their risk is mitigated and they are able to recover the loan amount through the insurance payout.
9. Tax returns
You will have to submit Income Tax Returns (ITR) for at least three previous years. Lenders may require your ITRs and that of your business.
10. Credit rating
Lenders often procure credit rating from agencies like Credit Rating Information Services India Limited (CRISIL), is a global analytical company. The credit rating includes payment history, credit scores, and public filings if any. In case there is any negative information on the report, you may find it difficult to avail of the loan.
Most banks and non-banking financial companies (NBFCs) provide such credit facilities. Lenders now provide you with an option to apply online to reduce the hassles of applying for a loan. Furthermore, the lenders offer affordable business loan interest rates to ensure you are able to service the loan without financial stress.