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What do lenders look for when approving your business loan online ?

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What do lenders look for when approving your business loan online


Funding is the fuel of any business. For any SME or be it any business model, the funding they receive when they apply for a business loan plays a major role in their uprise and success. A borrower can apply for a business loan and avail of funding from crowdfunding, banks, NBFCs, or your angel investors. 

Just as crucial funding is for your business venture, it is equally crucial for you to understand all aspects associated and all stages involved in it before you apply for a business loan.

The entire step-by-step procedure involved in a business loan begins as you apply for a business loan online, your application going through several stages of verification and other necessities to the approval of your business loan online

This process is engaging and also tiresome at times. But today, as the entire procedure has become online, it has made things easier, yet you must know the details of everything you'll be going through.

 To make the best of your time and efforts when you apply for a business loan online and avoid engaging in something that won't turn out fruitful for you, you must have basic knowledge of what you are dealing with. This is where this article comes to your rescue.

Now first and foremost, what can be your possible reasons for wanting to fund:

Why would you require a business loan online?

  • To avoid cash flow troubles
  • To buy machinery or equipment
  • To purchase inventory
  • To grow working capital
  • To open a new branch or to expand your business

What lenders look for before giving a business loan online?

What do lenders look for when approving your business loan online

In synchrony and conjunction with your integrity and reputation, lenders also consider various other factors before giving a business loan online and before they make up their mind whether you and your business will be worth their time and investment or not.

To begin with, certain conditions are considered by the lender (as well as the applicant or the borrower before they apply for a business loan:

  • Loan amount
  • The applicable interest rate or fee
  • Charges
  • Repayment schedule
  • Loan term
  • Other factors

S.NO.

Factors that matter in a business loan online


1

Credit history

2

Repayment capacity

3

Cash flow

4

Income to debt ratio

5

Collateral to keep leverage

6

Capital

7

Market value and reputation



1. Credit History 


Let us now get acquainted with these factors, which your lender will surely take into consideration before they approve your application for a business loan online.
Credit history

As said often, history speaks for itself; this phrase is aptly applicable when trying to attract significant investments and lending when you look for a business loan online. Lenders may pay a good amount of attention in assessing and analyzing your records. All your tax records, personal and business credit history, i.e. entire financial history, are in the picture.

  • Ensuring that your previous record of repayment of loans and lending is convincing and unquestionable is an important aspect before you apply for a business loan. That is achievable only when you act appropriately in the present.
  • Of course, your previous business ventures' track record matters, and it concludes that your ability to organize and money management skills is under assessment. 
  • Records and Credit history holds a huge weightage as your attitude and skills are reflected through our previous journey. 
  • A Credit score lying within the range of 700-750 is preferred before giving a business loan online, whereas if your CIBIL is below 680, it might be worrisome both for you and your lender as you will then be a high-risk borrower.

Your career stability and consistency might provide additional peace of mind to your lender and hence better outcomes in your favor.

2. Cash Flow 


To understand it in a nutshell, cash flow is the net cash coming in and moving out of your business at any particular point in time.

A positive cash flow indicates that there's more money coming in than moving out, whereas a negative cash flow is a reverse alert.

Cashflow keeps your business afloat. 

A high business cash flow assures your lender, whereas a low business cash flow can be alarming as it poses a potential risk. Lenders often demand to take a view of the borrower's account statements as bank/account statements can clear the entire picture for them to reach a decision.

By paying heed to certain aspects as you apply for a business loan, like setting goals, having a well-defined payment policy for your business, and performing regular cash flow analysis for your business, you can manage and improve your business cash flow.

3. Repayment Capacity


Your ability to repay the entire loan amount is called repayment capacity.

Before lending you any amount, your lender will want to ensure that you are capable of paying back the amount, and for this, they go through your records before approving your business loan online.

When you apply for a business loan, you authorize your lender to look into your ITR, Bank statements, and credit report indicating your credit and debits at present. 

For established and running businesses, records, and recent profit/loss statements do the necessary. Still, if your business is a new venture, then you might not have any history of positive cash flow or profit/loss data to present. In that scenario, you can include data-backed company projections to get a business loan online.

Lenders might also be inquisitive about your other income sources while assessing your capability to repay the loan, especially for a new business. Your outstanding debts (if any), living expenses, and even your dependents will also come into the picture here when you apply for business loans online.

4. Income To Debt Ratio


The ratio of your monthly expenses to your monthly business income is referred to as the income to debt ratio.

 A higher income to debt ratio might drive the lender away from you as it poses a higher risk of forfeit/ defaulting in their payments. Ideally, the ratio should be below 40%, and further, the lower the ratio, the better for you.

The ratio establishes your creditworthiness.

 Clearing all due debts and working on increasing your cash flow as well as credit score is advisable before applying for any business loan.

Collateral to keep leverage


The future is unpredictable and uncertain; hence even the strongest and well-established business models can fall prey to unforeseen circumstances. This might inhibit the borrower of its repayment capacity. This is when Collateral comes into the picture. This limits the risk involved in any business loan online.

Collateral can be anything. 

It may be the machinery of your business, any real estate property, or any costly equipment, Vehicle, or accounts. Usually, it is of the same value as the loan amount. In any case of repayment of the loan amount, the lender may seize the collateral and even sell them to recoup the losses.

5. Capital

All your business assets, as well as liabilities, count under this.

This might be machinery, specialized equipment, your products, or infrastructure, i.e. things of material value. These also serve the purpose of collateral in extreme situations.

Also, suppose you have invested a good capital amount in your business in the past. In that case, you are more likely to be an attractive prospective borrower as this would further enhance your commitment towards the profit-oriented pitch.

Lenders like to evaluate your capital to ensure that they can recoup their losses if you fail to repay the loan.

# The financial stability of your business can do wonders in your favor.

The age of your business and reputation in the market can also serve a purpose. 

If you have a good reputation in the market and have been in the market for a while, lenders are likely to be more interested in you than ones starting new. The main reason for this is that with age comes experience and dependability. With some experience in hand, you will also have your records to speak for themselves. 

On the contrary, if you are new, do not be astonished if your initial loan applications don’t make it through. Just stay consistent, keep working on other aspects, and present a dependable business model with utter commitment.

Documents you will require when you apply for a business loan 

Loans include a lot of paperwork, and it is justifiable too. You need to make certain documents available to your lender at the time of loan application approval; hence, it is advisable to be prepared before applying for a business loan online and keeping the document folder handy. 

Following is the list of some documents you will require:

  • Complete Loan application form
  • ID Proof: Any One of the following: 
  • Driving License 
  • PAN Card 
  • Passport  
  • Voters ID Card  
  • Aadhaar Card
  • Address Proof (Any one of the following as your address proof )  
  • Ration Card 
  • Telephone Bill
  • Electricity Bill 
  • Passport 
  • Trade license.
  • Lease agreement 
  • Sales Tax certificate

Income Proof

Your Bank Statement of Last 6 months (time duration varies from Lender to Lender).

Financial Documents

Along with computation of Balance Sheet, Income & Profit & Loss a/c, ITR for last 2 years (time-variable as per your lender).

Business Continuity Proof

Business Ownership Proof: Other Mandatory Documents like Sole Proprietorship Declaration, Certified true copy of Memorandum & Articles of Association, business license, and contracts by the authorized body.

The last 3 years audited financials.


Proper usage of the amount after you apply for a business loan, can bring great results for you

It can help you to:
  • Consolidate debts, 
  • Provide capital to the business 
  • Expand the existing business.

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