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Most lending institutions in India provide both secured and unsecured loans to entrepreneurs to set up and expand small businesses. But the eligibility criteria for small business loans differ from one lender to another.
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Most lending institutions in India provide both secured and unsecured loans to entrepreneurs to set up and expand small businesses. But the eligibility criteria for small business loans differ from one lender to another. Many lenders focus on a wide range of factors while reviewing a small business loan application to assess both lending risk and heath of the small business. Hence, It becomes essential for entrepreneurs to understand the factors affecting small business loans so that they do not face any problems during the process.
Factors Affecting Small Business Loans Credit History and Score Credit Information Bureau (India) Limited (CIBIL) prepares Company Credit Report (CCR) based on the information submitted by various lending institutions. Most lenders use CCR as the primary tool to assess the business’s credit history and loan eligibility. At the same time, they also check if the small business owner has a good personal credit score. Most lenders even decide the loan amount, interest rate, and repayment schedule based on the business’s credit history and the entrepreneur’s credit score.
Financial Performance and Standing The lenders normally evaluate the financial health and performance of a small business based on its profit and loss account/income statement, balance sheet, and cash flow statements. They require the small business owner to submit the latest income statement and balance sheet, along with interim cash flow statements. These financial documents help lending institutions to assess the financial performance and potential of a small business by calculating important financial ratios like debt-to- equity, liquidity and operating margin.
Collateral Often lenders do not provide unsecured business loans to small businesses and start- ups to avoid high lending risk. They reduce lending risk by requiring the small business owner to use his assets as collateral to secure the business loan. In case the borrower fails to repay the loan timely and fully, the lending institution can recover the credit by seizing and selling collateral. However, lenders allow small businesses to use their stock, equipment, and similar business assets as collateral. For instance, an entrepreneur can avail credit by buy equipment by using the title to the same equipment as collateral.
Personal Guarantees Many lenders ask the borrower to bring guarantors on board if the business is owned by several partners or its ownership and management is separated. In such scenarios, the lending institutions ask the borrowers to submit financial statements completed by each stakeholder. The borrower has to submit personal financial statement of each stakeholder in a standardized form provided by the lender. The lender will review the financial statements of individual owners to ensure that they remain associated with the small business till the loan is repaid in full.
