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5 Important Factors that Determine your Approved Business Loan Amount

by janeausten

In today’s environment of innovation and development, new business ventures are coming up in droves. The wave of entrepreneurship that began about a decade ago has grown exponentially today. Ideas are highly invaluable and people who have them sometimes need to move fast to make those ideas a reality. In such situations, businesses require funds for setting up and scalability.

A business loan is a useful financial tool for small to medium businesses. Most leading financial institutions provide business loans to new and existing companies provided they meet the existing loan approval criteria. 

Factors That Determine Your Business Loan Approval and Amount:

Some of the leading factors that contribute to your business loan approval or rejection are given below. 

1. The credit score of the proprietors, promoters, or directors:

A credit score evaluates a borrower or applicant’s creditworthiness. This credit rating is performed by agencies like ICRA or CRISIL on a borrower’s ability to pay back loans. It’s based on an individual’s personal credit history concerning credit card bills, home loans, and personal loan payments. Credit ratings help evaluate the possibilities of risk involved with certain borrowers.

An individual’s CIBIL score is proof of their ability to pay back a loan based on multiple factors besides their credit history. It also considers their current income, disposable income, job and employment status, and present account balance. 

A credit rating is an important factor that financial institutions consider. It is directly proportional to the loan amount sought for a new business. The assessment report on the creditworthiness of all the individuals in charge of a business as well as the business itself can make or break your chances of getting a loan.

2. Business’ cash flow status, including liabilities, outstanding payments, and cash credit history:

Financial institutions perform due diligence before approving a business loan so that they get a clear picture of the financial health of a business. This research helps in analyzing any chances of defaulting or recovery methods should payments not come in on time. A business loan heavily depends on reliable cash flow statements of a business.

As a business owner looking for a loan, you need to detail how the funds will be used and how they will help generate revenue. This revenue is what will ideally repay the loan. If not, you need to have additional sources of income. Therefore, the project analyst analyses the business viability based on several factors and the credit manager’s onsite report. Only after that is the loan amount decided. 

3. Nature of the business:

Businesses are generally classified into groups or categories based on the nature of their services. These could be Growth, Cyclical or Defensive companies. The category also depends on the maturity of the business and which stage of growth it currently falls under. 

  • A defensive company is more immune to economic changes and can perform equally well or worse under any condition. These include companies like personal care brands, health care, and household products. 
  • A cyclical company generally depends on the state of the economy for its performance and success or failure. This includes industries like automobiles. People are more likely to buy cars during an economic boom and during a time of flourishing finances. 
  • A growth company is usually a new business. Growth businesses generally grow exponentially during their initial stages because of a novel idea or offering. They stabilize and become defensive companies going forward. 

Therefore, the loan amount and its viability depend significantly on the growth stage and type of business towards which the funds will go. It is also impacted by the expansion plans and revenue models the business is employing as well as the country’s economic state. All these factors significantly impact the business and its growth in the foreseeable future. 

4. Collateral available:

Business loans are secured loans which means they demand collateral as security before the loan is issued. Having assets to use as collateral is an easy way to secure a business loan as it comes to the lender as a guarantee of repayment of the loan. Should the business fail to pay back the loan, the lender can recover as much as possible by taking over the collateral.

To know the business loan requirements after understanding the nature of your business, reach out to leading business loan providers like Fullerton India today.

Also Read: How Real Estate Apps Make Things Easier For Consumers and Agents

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