A business loan is one of the good sources to boost the business and it acts as a catalyst for the entrepreneur. The loan will help you to start up the new business and with the same money, you can purchase the equipment and other accessories required to run the business operations. Now the question arises which are the several factors responsible for the clearance of business loan? This information will boost your confidence and enable you to approach the lender in an effective manner.
What are the deciding factors for the approval of a business loan?
Business Model Plan
Over the last decade, several fintech companies has raised funding for their operations.
The business model is an important factor which will help you to get the loan from the lender in an easy way. The model should be framed in such a way that should provide comprehensive information about the business so that the lender can easily understand your business plan. Amid preparing the plan few things you should highlight in the business model such as mission, an overview of the business, market research and significantly more. If you are well versed with such information and can present the same in the descriptive form in front of the lender, then chances for approving the loan becomes easier.
To run any business, you will need sufficient money to meet the expenses in inventory, market research, operation and much more. At this stage, you will have to frame the financial statement of your business in such a manner which will show a clear picture of the expenditure of a business.
Now you are very clear with the estimation of the revenue and your next move is to convince the lender as the lender will check your repayment ability and for the same will use debt-service ratio tool which will enable them to offer the business loan which you can afford, in short, this tool will help them to judge your loan repayment capacity and how much you can manage. In the debt -service process, the lender will look on your business balance sheet and will deduct all the monthly expense done in running the business such as operation, inventory cost, space on rent and much more. The final result will be then divided by 1.5 and the net outcome will be your monthly amount which you can afford for a business.
This is a tool which enables the lender to judge your creditworthiness. The score totally depends upon your past credit histories such as the dues cleared in the past, relation with the bank and significantly more. The financial agencies have framed the categories of the borrowers as per the credit score such as Exceptional (800-850), Very Good (740-799), Good (670-739), Fair (580-669), and the last one Poor (300-579).
So, if you belong to any of the first three categories, then you can easily avail the business loan. However, if you are struggling with the credit score, then it will be very tough for you to get a loan from the lender as they will feel insecure about the repayment. In this case, you will have to repair your credit score and for the same clear the pending dues on time and if possible, consult with some credit rating expert to boost your credit score.
Cash Flow Management
The lenders always go through the cash flow sheet of your business and this helps them to judge your repayment capacity. If your business has inconsistent cash flow such as payment delay of the customers, pending invoices and more will present the negative image of your business in the eye of the lender. So, it is always recommended to maintain the buffer stock so that you can utilize the resources to meet the unforeseen situations and this creates a positive impact on the lender too. Hence, prepare your balance sheet in a proper form and make sure to get the good output so that you can easily avail the business loan.
The application form must be filled with the relevant details and there should not be any margin of error. If the field is left blank or an error occurs in the application form, then there may be the chances of the rejection of the business loan. So, it is recommended to read all the details carefully and then start filling the form as this will reduce the error margin.
After knowing about the deciding factors responsible for smooth approval of the loan, now it’s time to go through the Do’s and Don’ts amid applying for the business loan. This will help you to avail the loan in an efficient manner.
What are the things to be kept in the mind while applying for a business loan?
- Be confident and present your business proposal in a proper manner so that the lender will get interested in your business and can think for the approval of the loan.
- Before going in front of the lender, do some homework and cross-check the interest rates offered by the various lenders as this will help you to get the loan in the minimum interest rate.
- Prepare your estimate business account in a proper manner and try to show the same using the flow diagram as this offer the clear picture of the revenue and will enable the lender to understand easily.
- Think about your assets and this will act as collateral because the lender always seeks for the collateral against the business loan. The reason behind the same is simple; on the off chance, if you fail to repay the loan amount then the lender will seize the assets to recover the loan amount.
- If possible, consult with your lawyer before signing any legal document as this will help you to overcome from any legal consequences.
- Make sure to carry all the relevant documents which are necessary for the business loan.
What are things to be avoided while applying for a business loan?
- Never ask the lender ‘how much they can offer for a business loan’ because it creates a negative impression on the lender. Hence it is recommended to put your proposal and requirement in a decent manner.
- Never overestimate your business revenue and your income.
So, these were the key things you must keep in your mind before applying for a business loan. While applying for the business loan, you must consider these major factors and the same will help you to get the loan in an effective manner. Hence, prepare well and crack the door to give sky height level to your business via business loan.