With the government bringing out more and more schemes like Start-up India to promote entrepreneurship amongst the citizens of our country, especially the youth, more and more innovative start-ups have come on in the bigger metropolitan cities of our country like Bengaluru, Mumbai and New Delhi. However, out of these many start-ups, research and studies have shown that approximately 90% of the startups fail. One of the biggest reasons why most startups fail is because there comes a point when the promoters aren’t able to raise capital to continue the business.
A business cannot run without funding at appropriate times. Getting access to cheap capital is the prerequisite for making a business successful and fulfilling the principle of going concern. Capital is required at all times, before the business starts as the initial investment and once the business starts, as additional investments or working capital. Hence, it is very important for businesses to be able to access funding at all times. However, there are several reasons and various factors that determine whether the loan that has been applied for is approved or rejected. Given below are the factors which affect the business loan application.
Factors affecting Business Loan Application:
- CIBIL Company Credit Report
This is one of the most important factors that the proprietors need to keep in mind while submitting a business loan application. Just like individuals, companies too have their reports of their financial history that makes them eligible or ineligible for a business loan approval. A CIBIL Company Credit Report is a record of a company’s credit history as well as financial transactions that has been provided by the banks and financial institutions to the Credit Information Bureau (India) Limited (CIBIL). This is one of the most important documents required by your financial lenders as it provides them with an indication of the company’s financial behaviour. It is one of the decisive factors that the lenders will look at in order to determine whether to approve or reject your loan.
There are a few things that a business or the proprietor needs to keep in mind in order to maintain a healthy Company Credit Report (CCR):
- Timely Repayment of Loans: One of the most important factors is timely repayment of loans. If there is delay in repayment of loans or if the company has defaulted in interest payment or principal repayment, the probability of the applicant’s loan getting approved reduces.
- No default in Credit Card Repayments: Credit card repayments are also as important as traditional loan repayments and hence, the proprietor should make sure that there are no credit cards default in the credit history of the company.
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- Profits of the Company
This is another very important factor which determines the application of business loans. The lender wants to make sure that the company he is lending to has strong fundamentals and financials and that the company has been generating a good amount of profit over some time. This is essential to understand whether the company would be in a position to repay the loan along with the interest. Additionally, these also show the lender how risky the investment would be for them. If the company has lower profits or is making losses, then the lender would charge a higher rate of interest for the loan from the company due to the associated risk. This would lead to higher EMIs for the company. On the other hand, if the company has high profits, interest rate charged would be lower leading to lower EMI to be paid by the company.
- Debt Levels of the Company
Nowadays, the biggest reason due to which the lenders reject loan approvals is because of the high debt levels that the balance sheet of a company holds. Lenders essentially do not like funding companies which have a ton of debt on their books as they are worried about getting repaid. Additionally, when a company has a lot of debt, then most of the revenue generated usually goes in interest payments and debt repayment and hence generates very little profits. Hence, lenders do not like to invest in companies that have a lot of debt on their books.
- Availability of Collateral
Most of the small-scale businesses that are not able to access funds today is because of lack of collateral. Whenever a lender approves a loan, it demands a collateral to be kept with the bank. Most lenders prefer a high-valued collateral while providing business loans. This essentially reduces the risk for the lenders as they could take possession of the asset and sell it in case the borrower is unable to repay.
- Business Plan
Another important point that lenders would consider would be the prospective business plan. The lenders want to know that the projects in which the company would use the money borrowed from the lenders would be profitable. If the return on investment for that project is high, then the lenders would be willing to lend to that borrower. However, if the return on investment for that project is low or if the lender feels that the investment is too risky, then the lenders might not want to provide the funds to the company. Hence, the business plan that the company would pursue after receiving the funds is of extreme importance for the lenders. \
It is quite evident that access to capital is one of the most important aspects of a business. Hence, if a company is unable to raise capital, then it won’t be able to continue its business for long. From the above analysis, it is now clear what are the factors that determine whether the loan approval of businesses get approved or rejected.
At Indifi, we are committed to changing how Businesses approach loans. We are a technology platform creating easy loan origination, and leverage our segment understanding to create risk models. This brings multiple partners and lenders to fill the credit gap, helping small businesses access unsecured business loans, through a quick and simple process. We have tailored loans for Travel, Hotel, e-Commerce, Restaurant, Trading and Retail businesses.