Though business loans are approved without collateral’s and are offered easily, lenders are quite cautious when sanctioning the loan. There are certain things which banks check before the loans are issued. These checks are done by banks to ensure that the Business loan which is being sanctioned would be put to productive use and would be repaid without defaults. If it is a collateral-free loan, the risk of default is the highest and so lenders check the various parameters before they grant you funds for your business. Many of you don’t understand what banks exactly look for and so end up getting your loan application rejected. So, here are some of the important things which banks check to approve the loan –
● The fulfillment of business loan eligibility criteria
Business loans have a set of eligibility requirements and potential borrowers and their respective businesses are required to fulfil these criteria before the loan is issued to them. Some common criteria include the following –
- The applicant should be between the ages of 21 years and 65 years
- The business should have been in existence for the last 3 years if the loan is sought by self-employed professionals. For businessmen, the business vintage should be at least 5 years
- The annual turnover of the business should be at least INR 1 crore
- The business should have an existing stable relationship with the bank for at least the last 6 month
- The credit score of the borrower should be 650 and above
- The applicant should have a self-owned house or office premise
How the borrower measures up to these criteria is the first thing which is checked by the bank before approving a business loan.
● The business plan and cash-flow records
Before granting the business loan, banks want to know the purpose of seeking the loan in the first place. They look at the business plan to analyse the requirement of the loan. The cash-flow reports of the last few years and the projections of the coming years are also checked thoroughly. This gives lenders an idea of repayment of the loan. They understand how the business would pay off the loan and whether such payments would be affordable or not.
● Audited financial reports of the business and applicant
Though the cash flow projections show the expected revenue of the business, nothing shows the true picture than the financial reports for the last few years. Audited profit and loss accounts and balance sheets of the business are used by the bank to assess the financial stability of the company. The income tax returns also come in handy as they precisely state the profits earned by the business over the last few years. Moreover, the financial documents of the applicant are also assessed because if the business is not able to repay the loan, the responsibility lands on the shoulders of the applicant. If the financial reports depict strong financial standing of the business, the loan is issued easily and the business loan interest rate might also be reduced.
● Credit history of the business and the applicant
Just the credit score is not enough for banks to judge whether their loans would be repaid on time or not. They also assess the credit history of the business as well as the applicant. The account payables and other liabilities of the business are checked and so is the personal debt history of the applicant. If the business and/or the applicant already have existing debts, the loan amount and its issuance might be affected.
● Assets owned by the business and applicant
Another thing which is assessed with the liabilities is the assets which the business and the applicant own. If the business has assets the lender is assured of the repayment of the loan. Even in the case of a default, the assets can be sold to realize the outstanding debt. The applicant’s personally owned assets are also checked for double security. If the business assets fail to clear off the debt, the applicant’s assets would do the job.
So, you should understand these factors which every bank checks before approving your loan and increase your chances for business loan approval. When you know what lenders look for you can prepare yourself in advance. A well-prepared application wins half the battle for you as the loan is issued without hassles.