Every small entrepreneur has a dream to expand their ambit and compete with industry leaders. But not all of them succeed, as only a handful of them are able to raise funds at the right time. While a business may fail due to various reasons, a shortage of funds is one of the most common factors. At some point in business operations, every business requires external funding, in the absence of which your business may miss lucrative opportunities available in the market. Making the move at the right time is all that matters.
Raising funds with business loans is one of the most advantageous propositions for small business owners (SMEs and MSMEs). However, there are prerequisites that you need to fulfil in order to qualify for a business loan. If you are confused about whether your business can qualify for a small business loan or not, this guide is definitely meant for you. Here, we will discuss a few factors based on which lenders approve business loans for small businesses.
Your business credit score plays a crucial role in getting your loan application approved or rejected. Credit score is also significant to determine the interest rate applicable to your business loan amount. If you have a good credit score, you have higher chances of getting a loan approval, that too at a low interest rate. While seeking a business loan, you must be aware that the lender will look into your credit history and evaluate your loan application based on that.
Age of Business
A large percentage of startups shut down within the first year of their establishment itself. So, it’s an obvious reason why many lenders, including Clix Capital, typically offer small business loans to businesses that have a vintage of at least three years. However, instead of looking at your business registration date, lenders would want to look at how long you have been operating a business account.
Income and Cash Flow
A positive flow of cash is important for any business. Healthy and steady cash flow assures the lender, that as a business owner, you have the potential to repay your business loan in time. Simply put, your business cash flow represents your business health. Besides cash flow, lenders also look at your income to get an idea of your business profitability. To take a view of your income and cash flow, lenders ask for a variety of financial documents, including the following:
- PAN Card for a firm, company, or individual
- 6-months bank statement
- Copy of the most recent Income Tax Return form
- Computation of income, audited balance sheet, and profit & loss account for the last 2 years
- Proof of continuity of the business of 3 years, which can be your sales tax certificate, establishment, ITR, or trade license
Apart from these, some lenders also ask for your business turnover to get an idea of your financial situation. To qualify for Clix Capital’s business loan, you must have a minimum turnover of ₹ 1 Crore.
Credit Utilization Ratio
By looking at your credit utilization ratio, the lenders measure your creditworthiness and how hungry you are for credit. This ratio is the portion of available credit you use. You need to have a credit utilization ratio of less than 30% to get easy loan approval. However, if this ratio is above this threshold, you must try to reduce it before applying for a business loan. Otherwise, you may end up facing a blatant loan rejection.
Lenders look into your debt-to-income ratio to measure how much amount you are already spending on debt payments from your monthly income. Most lenders ask for a debt-to-income ratio of maximum 50%. The lenders want to ensure that your monthly loan payments and other obligations are within 50% of your income every month. The remaining 50% can be used to conduct other business-related activities.
Lenders want to look at your business balance sheet to measure your financial health. It is a basic document that contains the summary of your business finances, including your assets, equity, and liabilities. Ideally, the total assets of your business should be equivalent to the amount of your equity accounts and liabilities.
Business loans can be secured or unsecured. For a secured loan, you need to provide an asset like property, shop, or gold to the lender as security. However, if you do not want to put your asset at risk, you can apply for an unsecured business loan from lenders like Clix Capital who sanction your loan based on your eligibility, credit score, and documents.
It has become extremely easy to support your small business with Clix Capital’s business loans. Look at the abovementioned factors that you need to qualify for a business loan. If you are eligible, just apply for a business loan and provide the needed details to get your loan approval fast and easily without much ado.
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