A business loan is a loan specifically opted for business. The business loan also has debt that the borrower has to repay with interest. A business loan can give a kick start to your new opening business or can help into the crisis of your growing business.
Entrepreneurship and entrepreneurs are the reason for the growth of business loans. A business loan is an absolutely normal term for entrepreneurs. Most banks in India extend business loans to proprietorship firms, partnership firms, and private limited and public limited companies. They provide funds to the businesses up to sanctioned amounts with the mean of loan. A term loan is almost similar for all kinds of cases. Still, business loans differ from others in terms of interest rates, tenure, etc. across banks and NBFCs. There is also an option to avail low interest rate personal loan that people can use.
It is always advisable to be ready for the next step. So, before applying for the loan applicant has to be equipped with knowledge about the factors that contribute or play an important role.
A factor contributing to the business loan:
CIBIL score / CIBIL Score / Individual promoters or proprietors
CIBIL score or Credit rating or Individual promoters or proprietors or directors is one of the fundamental factors. Credit rating agencies like CRISIL and ICRA do the credit rating based on personal credit history. CIBIL Score shows your creditworthiness and also depends on credit history.
It is always useful to check what expectations are, on the other hand, from us. In this case, also, it is better to know what lenders expect from us in exchange for that they can provide business loans with certainty. Bank, NBFC also look for monthly income and family expansion to observe credit behaviour.
It is advisable to check your credit score before applying for a business loan. So, putting this cafeteria at the top of the checklist may help to own the desired loan amount.
Credit score depends on payment history, credit usage, credit age, and how often applicants apply for credit. This information reflects in your credit report.
Cash Flow Status of the business :
The bank checks the financial health of the business before funding them. They check the chances of recovery and analysis default by its category. Loans depend on reliable cash flow statements of the business. The business owner has to provide detailed documentation, including their plan with the loan and also plan of repaying it. They analyze the factors, business viability, papers too before approving the loan.
Types of business :
Businesses fall under the categories. Those are Cyclical, Defensive, or Growth companies by the nature of the business. Stage or status and maturity of business also matter.
Defensive companies are more stable during the ups and downs of the economy. Health care, household, personal care, etcetera companies survive during good as well as worst conditions.
Whereas cyclical companies depend on the ups and downs of the economy a lot? A manufacturing company is a perfect example of a cyclic company. Increment in demand for the stuff their business will go up. On the other hand, a decrease in demand for the stuff will lead to a down market.
Newer companies are counted under the growth companies. This business grows exponentially in the preliminary stage before it reaches maturity and gets stabilized as a defensive company.
Thus, the amount of the loan depends on the nature of the business. The stage, maturity, development, plan, etcetera affect the loan of the amount.
It is the most suitable way to fund a loan. It is a secured loan and easy to get in comparison to an unsecured loan that doesn’t have collateral. Promoters of the company or sole proprietors of the company can provide collateral to avail of the loan. As it is a secured loan, the bank approves it easily with trust.
Loan for Micro and Small entrepreneurs:
Banks and NBFCs have a strict procedure for business loans.
Detailed documentation, collateral, etcetera are preferable.
Small entrepreneurs suffer a lot during this process. CGTMSE is one of the best options to get a collateral-free business loan for small businesses. CGTMSE stands for Credit Guarantee Fund Trust for Micro and Small Enterprise for up to Rs. 1 crore.
We saw a lot of factors that contribute to business loans. Depending upon the factor like business viability, required documents are the essential part of the process.