Qualifying for a small business loan can be the difference between continued growth and slow decline for many companies. If you run a small business in India, you know that banks look at a lot of factors before making their decision about lending to you. For example, maybe you know about the company credit report, and how important it is to pay back your debts and keep current with the bills, but do you know what else the bank is looking for in a business borrower? Although the process may seem complicated, once you understand what the bank is looking for and understand the procedure, it’s manageable. The following three factors don’t show up on your credit score, but they’re important when you’re looking for a small business loan.
At first glance, your company history may seem like the same thing as your credit record. In fact, there is a lot of overlap here, but the two factors are different in some key ways. Your company credit report is mostly an assessment of how responsibly you handle your debts. While that’s often enough for a personal loan, for business loans, banks usually want to know more. When you apply for a small business loan, Be prepared to show the lender reliable documentation when you apply for a small business loan, including when you started your operations, how much revenue the company has generated in consecutive years, and whether the trend lines are going up or down. By assessing your company’s profitability over time, along with looking at major events like a corporate bankruptcy, the bank can get a clearer picture of where you’re likely to go in the next few years.
Income and Assets
Once your history is established, your business loan lender wants to make sure you’re profitable now and that you’re likely to have the cash flow to pay back the loan. You can establish this via your tax statements, which are a generally reliable index of how much money comes into your business every month, though some lenders are happy with annualised statements showing yearly income.
The lender also wants to see your assets. Assuming the worst, if you suddenly stop paying on your loans and the bank has to move toward liquidation, they want to know you have enough assets to cover the debt you’re taking on. As a rule, you don’t have to have a direct one-to-one asset tally to offset the amount of the loan, but very few lenders feel safe issuing a loan for more than three times your current net worth.
Many companies operate with standing debt, whether from previous loans or on a current credit balance. This is not automatically a bad thing, since keeping up regular payments shows you can be trusted with debt. You don’t want to let things get out of hand here, though. Too much debt relative to your income and assets signals to the lender that you might have a hard time keeping up your payments in the future. As a rule of thumb, it’s good to keep your total credit utilisation — the amount you owe relative to what you could borrow — under 30%. If, for example, you currently have a company credit card with a Rs.680,000 limit, you want to keep your balance on that card under Rs.200,000 to show you’re in control of your company finances.
Your company credit report is just one factor banks look at when you’re applying for a small business loan. Other factors, such as your history of success, how much you own, and how much you owe, are just as or more important when the decision is being made. Before you apply for a loan, take an honest look at all the factors affecting your lending profile.