Loan financing can be extremely crucial to mark success in a business. This loan amount can be used to consolidate debt, finance expansion of the company, so on and so forth. To be eligible for a small business loan, any Bank/NBFC looks at a few aspects thoroughly, namely capacity, collateral, capital, character and conditions. If your business is deficient of all these factors, then availing a small business loan can turn out to be tedious.
Factors Consider while taking loan
Let’s shed light on all the relevant factors which impact your position to take a loan.
Capacity: Any lending institution is responsible to have it repayments back. An individual’s potential to make a timely payback is called financial capacity. Whenever a loan application is received, its completely scrutinized against the credit score to assess eligibility. The lender checks on your repayment history & existing debts to understand your finances better. In-fact, the debt coverage ratio is considered primary to see if a minimum debt service is plausible to do.
Collateral: At a time of distress, even the most powerful business empire can be withered. This is exactly why a financial institution would require you to back up their business loan with security. This will not only secure their interests but also have their money returned. Assets which stand tall as collateral are property, business assets, vehicles, financial accounts, etc. When you sign the loan contract, the pledging clause comes as a part of it. If at all you fail to repay the loan, the bank puts a lien on the asset straight away. And then those assets are sold off to make up for the loss.
Capital: As a part of financial review, your business capital is also included. It is the minimum capital a company must already hold to avail a small business loan. If your company is not well-funded, the bank/NBFC may label the loan to be risky and disapprove. The bank also needs to be rest assured before lending its money. This reflects as firm commitment to your business, vision & success. Looking at the strength of your personal financials, the bank may process your loan request.
Character: Perhaps, not as much as your financial capacity, but the basic character of your business is relevant. It does form an important aspect for consideration after checking company’s history, references and reputation. If your company has a clean credit record & acceptable reputation, then it will be much easier to get a loan along with other important criteria.
Conditions: Lastly, the financial institutions parade the economic climate surrounding the lending industry. This is beyond the borrowers reach & can no way be controlled. Within a high-risk environment, a bank may reject your loan proposal even if you have the capacity and collateral. This is mainly witnessed if the bank witnesses a future dent. So essentially, you must stand out in all important aspects to avoid an unnecessary ruckus. If you’re left disappointed, look for a lender which is willing to take on risk.
