As small businesses are contributing immensely to the Indian economy, many lenders (both public and private financial institutions) now offer different types of business loans to help business owners get funds for their everyday operations.
If you are a business owner, then you can avail a business loan as per your requirements. For business owners’ convenience, the lenders have simplified the loan application and approval process. Lenders like Tata Capital offer small business loans online. For business loan offers, you can approach Tata Capital, one of the leading lenders in India. They offer business loans at competitive interest rates starting from 19% p.a. You can visit their website to apply for the loan.
This means you need not visit the lender’s office or carry copies of documents; you can apply for the loan you want, upload the digital copies of the documents, and get the amount credited to your bank account.
Even with the simple application process and different loan options, you must be careful of the factors that could affect your chances of getting a business loan. Listed below are some of these important factors.
- Low credit score
The credit history of the business, and your personal credit score is one of the critical factors that lenders consider while approving business loans for new business. After you submit your application, the lender will inquire about the company’s credit profile and its founding members to know how the business has handled the debts previously.
A credit score is essentially a three-digit number ranging from 300-900. The higher the number and closer to 900, the easier it is to get the loan. The credit bureaus assign the credit score to all individuals and businesses based on tier credit behaviour and past credit transactions.
One of the most popular credit bureaus in India is CIBIL, hence a credit score is commonly referred to as CIBIL score. Generally, the lenders have a minimum credit score requirement of 700. If your business’ credit score is below that, then getting a business loan would be challenging.
The credit score of the business also has a significant impact on the business loan interest rate. A higher score may help you get the loan at a discounted rate and vice-versa.
- Not providing sufficient documents
Not many people understand the importance of complying with the lender’s documentation process to get sanction for their business loan. When you apply for a loan, you must provide a range of business-related documents and KYC (know your customer) documents to the lender.
If you fail to submit any papers required by the lender or provide incomplete documentation, then you may face unnecessary delays in the approval process. In the worst-case scenario, the lender may reject your loan application.
So, it is better to check the lender’s documentation requirements for different types of business loans beforehand to avoid rejection of your loan application and last-minute hassles.
- Not offering sufficient collateral
A business loan is a secured loan, meaning you may have to provide collateral to the lender as a security against the amount you borrow. Typically, the lenders determine the maximum amount you can borrow based on the value of the collateral you offer.
If you fail to provide collateral or the value of the asset is less than the loan amount you want to borrow, then the lender will reject your small business loan request. Generally, lenders finance a maximum of 60-70% of the value of the property you pledge as collateral.
For example, let us assume the value of the collateral you offer is Rs. 1 Lakh. In such a case, the maximum business loan amount can be up to Rs. 60,000.
- Criminal history
If you, your partner, or any of the key members associated with your business, like directors, founders, etc., have a criminal history, then getting a business loan will be a challenge. The financial institutions prefer lending to businesses and individuals with a clean history and no records of their involvement in illegal activities.
- Limited or inconsistent cash flow
Limited or inconsistent cash flow in business can be a major red flag for lenders. If you don’t have enough cash flow from the lender’s perspective, then you may struggle with EMI payments while managing daily business expenses. In such a scenario, the lender may reject your business loan application.
Even if they sanction your request, you may not get the desired amount, or they may charge higher interest on the loan to mitigate the risk they are undertaking in granting you the credit.
- New business
Most lenders in India prefer lending loans to businesses that are established and have been operational for a few years. If your business is new or in its early stages, then getting a business loan could be challenging for you.
There are some lenders that provide loans to new or start-up businesses provided they have a good cash flow and a solid road map for growth in the future. So, ideally, it is better to spend a few years in the business before you approach the lender for a business loan.
If you are looking for funds to set up a new business or expand/scale up your existing business, then you must be aware of the above factors that could affect your eligibility.