Finance is usually considered the backbone of all businesses. The words are also used as working capital, machinery or equipment and buy fixed asses. However, when it comes to a business owner, they face a capital crunch as often look for other sources of funds as his funds are exhausted.
You can also avail a business loan at this point as it is crucial for all business owners. A business owner can avail of it for several reasons, ranging from buying machinery and equipment to investing in working capital. Every business owner tends to have different requirements. The amount of a loan to be sanctioned depends upon various factors. 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:
- Credit Score
- Cash Flow
- Business Plan
Credit Score: When it comes to businesses, it is effortless to get the business loan sanctioned only if you have a favourable credit score. A loan amount that you require can be quickly approved only if your credit score is within the threshold of a loan lender.
A credit score tends to depict your creditworthiness numerically. Therefore, it is a significant and deciding factor that every lender considers before approving any such loans. However, a credit score also plays a crucial loan in deciding the rate of interest.
In case you have a low credit score, you will automatically become a risky borrower. Therefore, the lender will also offer you a loan at a high-interest rate. Likewise, if you have a high credit score, you will likely be at less risk, and the lender will also be willing to offer you a low interest business loan.
This credit report also includes a total number and the amounts of loans taken, timely repayment of loans, timely payment of all the bills, and if an individual is capable of repaying the debts.
The companies which evaluate and prepare a credit report include:
- TransUnion CIBIL
Generally, a credit score in India differs between 300 to 900. Although the recommended range is 700 and above, many lenders offer loans at 600 as well. So if your credit score is 700 and above, you can also get a higher amount of loan approved.
But at the same time, if you have a low credit score, then there would be red flags for lenders as they would be unwilling to approve loans as per your desired amount. Some red flags may include:
- Defaulted cheques
- Loan defaults
- Too many loans like the personal loan, education loan or home loan
- Lack of liquidity
- Consumer grievances
- Negative cash flow
Cash Flow: The positive cash flow of your company that represents your business has efficient cash that inflows to manage it all at its expenditure. All the lenders can access the liquidity of the business before they decide to lend any money.
However, the positive cash flow is another factor determining the amount to be sanctioned as a business loan. A positive cash flow can be indicated due to inadequate raw materials or finished project. It will be considered as a negative cash flow by the loan lenders. With the help of positive cash flow, the sales will constantly be increasing or steady.
Business Plan: When it comes to a solid business plan, it comes with a robust business model and accurate sales projection that will reflect your capability to afford and also helps in repaying the business loan. A complete soundproof business plan will be:
- Marketing Strategy
- Lists of projects completed
- List of projects in a pipeline
- Sales channel
A business plan should convenience the loan lenders on the aspects of future sales, profits and you can also have the ability to repay the debt with interest on time.
However, in addition to the business plan, you must also offer the business loan documents as required by the lender and also helps in meeting the eligibility criteria to get the business loan amount that you require at the moment.
Conclusion: Before you decide on selecting the business loan that suits your business requirements, ensure you know best and then only choose. A business loan term often depends on a variety of factors. It is difficult to get a conventional business loan with a low interest rate.