Any business, big or small, requires a regular inflow of funds to address various financial requirements. While most of them are met through revenues earned, there are occasions when businesses need to avail business loans.
Though the lending landscape has undergone a sea change over the past few years, thanks to the emergence of NBFCs, the core principles remain largely the same. Lenders look at these four important Cs before approving your business loan.
Capacity refers to your ability to repay the loan. Lenders closely analyse your business plan, repayment history and credit score among others to gauge whether you repay the loan on time or not. Hence, your revenues, liquidity ratio and debts play a crucial role in the loan application process. Make sure to clearly outline the repayment strategy to your prospective lender to enhance your chances of approval.
Generally, lenders ask for collateral before approving your loan. Collateral refers to any asset that lenders can fall back to in case of a default. The nature of collateral may vary and can encompass inventory and equipment among others. In some cases, you may need to pledge your personal asset such as your home as collateral. The collateral you pledge should have a value more or equal to the loan amount. However, some lenders offer business loans without collateral, thus letting you keep your assets free.
Additional Read: How to Easily Get a Collateral-Free Business Loan
Conditions include the current state of the economy impacting your business and lending. During a recession, it becomes difficult for business to repay loans. At the same time, lending institutions find it hard to fund loans. This 'C' also refers to the purpose of your loan. Lenders want to know how you plan to use the loan amount. Thus, it is vital to prepare a robust business plan where you can show how you'll use the loan and the revenues it'll generate.
Capital refers to your investment in the business. Before applying for a loan, make sure you've invested enough in your venture. As a borrower, it's essential for you to show financial commitments you’ve made in the past. Lenders not only evaluate the amount you’ve invested but also look how these investments have benefited your venture.
The 4 important ‘C’s help lenders to gauge your trustworthiness with regards to loan repayment.
In fact, these traits play a critical role in determining the time taken for loan approval.
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