The volume of business loans in India witnessed a 16.3% year-on-year growth on March 24 against 12.5% in the same period on March 23. Further, the total credit extended to businesses was around ₹82.73 lakh crore on March 24 against ₹71.16 lakh crore in the previous year.
These figures indicate a growing demand for business lending and an opportunity for lenders to streamline the different aspects of their lending process. These include simplifying the eligibility criteria, enhancing risk assessment models, and integrating cutting-edge technology for faster and more accurate loan assessment and disbursals.
This article particularly examines the different factors lenders must consider. But first, let’s understand what we mean by a business loan.
What is a Business Loan?
A business loan is a lending product specifically designed to make capital accessible to businesses for various purposes, including expansion, capital expenditures, operational expenses, and equipment purchases.
The terms of the loan, including interest rates, loan terms, and repayment schedules, depend on the business’s financial health, creditworthiness, and other key factors.
Now, let’s look at how lenders can validate a company’s eligibility for business loans.
What Are the Eligibility Criteria for Business Loans?
As borrowers, businesses must understand the different factors lenders consider while processing their business loans to ensure the entire process is as frictionless as possible.
Let’s examine them:
1. Credit Profile
A business’s credit profile is similar to the credit score of individual borrowers, aiding lenders in making informed lending decisions. The credit profile plays a key role in determining whether a company’s business loan will be approved.
Further, it is worth noting that companies with a healthy credit profile have a better chance of securing larger loans with favourable terms.
The credit profile includes details such as credit and repayment history, legal filings, and outstanding debts, key data that helps lenders assess the credit risk involved. Therefore, businesses need to revisit their credit reports regularly and eliminate inaccuracies and errors to boost their chances of loan approvals.
2. Documentation
Although lenders are going above and beyond to simplify the lending process for business loans, it is the borrower’s (company) responsibility to ensure they have all the mandatory documents with them for smoother loan approvals.
Additionally, businesses must ensure all the documents are updated and free from discrepancies to avoid delays and decrease the probability of loan rejection. Here is a list of all the important documents businesses must submit for faster loan approval:
- Income proof or bank statements (last 6 months)
- Income tax returns and profit-loss statements (last 2 years)
- Proof of address
- Photo ID proof and passport-sized photographs attached with application form
- Business owner’s Passport/Aadhaar card/Voter ID
- Sales tax certificate, ownership documents, trade license
It is important to note that this isn’t an exhaustive list of documents, and the lender may request additional documents if deemed necessary.
3. Debt-to-Income Ratio
The debt-to-income ratio (DTI) is one of the most crucial parameters lenders evaluate to determine the borrowing risk of a business. In simple words, the DTI ratio is the total debt of a company versus its total income each month.
The formula to calculate the DTI ratio is:
DTI ratio = Total monthly debt/Total gross income (monthly) x 100
For instance, if the company’s DTI is 20%, it indicates that around 20% of the gross income is utilised to pay off debts each month.
A low DTI ratio indicates that the business is repaying its debt effectively without overextending it. It is also essential to maintain a low DTI ratio to boost the chances of loan approvals and to let lenders know your business has sufficient income to pay off the debt.
4. Collateral
Collaterals play a key role in securing a business role as they are used as security during the loan process. Typically, lenders ask businesses to pledge a collateral to mitigate their losses and cover costs in case the business is unable to repay the loan.
In short, it is a backup for lenders.
Now, what can businesses use as collateral? Some of the most common assets used as collateral include machinery, inventory, real estate, tangible assets, and accounts receivable.
That said, in some unconventional scenarios, businesses can also deposit copyrights, trademarks, and patents as collateral.
Lenders perform their due dilligence to evaluate the collateral’s value and determine the loan amount a business can secure against it. Lenders reserve the right to seize all the collateral and sell them in case the borrower cannot repay the loan.
5. Business’s Financial Stability and Reputation
Lenders need a business’s financial stability to determine the loan amount and repayment terms. At this stage, a company’s financial documents, including profit and loss statements, cash flow statements, and balance sheets, are examined to evaluate its financial health.
Businesses with healthy finances are likely to get loans approved faster and with favourable repayment terms compared to businesses with poor financial health.
Lenders will also consider the business’s reputation, including its financial progress in recent years, red flags including huge debts, and legal disputes before approving a business loan.
Parting Notes
A business loan is an important lending product for businesses of all shapes and forms, including startups, MSMEs, and large enterprises. As more and more businesses turn to a business loan for different reasons, the onus is on the lenders to ensure these business entities are eligible for business loans.
Finezza offers a range of tools that aid lenders in making informed decisions while disbursing business loans. The robust document identification framework and bank statement analyser help lenders save time by automating and accelerating data entry workflow and analysing bank statements accurately.
Book a demo today to learn more.
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