Businesses need a regular funds flow for managing their varied financial requirements. Most of the expenses can be met from revenues but there are times when a larger expenditure needs to be incurred for future betterment of the company. Business loans are meant for such situations. Business owners, whether they are entrepreneurs or established businessmen, look at these loans when they want to expand their organisation. In fact, it can be said that business loans are a necessity for any enterprise to grow and succeed.
However, applying for a business loan and getting it approved are two different things. Banks offer loans to both small and large enterprises but they only provide money to borrowers who have the capacity to repay the loan in full and within the agreed time limit. They follow certain guidelines as a basis for their final decision. To understand these guidelines, let us look at what is called the 6 Cs of business loans.
Lending institutions always look for borrowers who have the characteristics that can tell them about their repayment capacity. Such characteristics include educational background familiarity with the industry. All these factors play a key role in getting your application approved. Borrower’s stability such as for how long he has stayed at his current address or operated from a particular location are also considered.
2. C for Conditions
Banks remain concerned about how you are going to use the loan amount. They want to know whether you are going to use it to inject capital to keep the business afloat or whether you are planning to expand your current operations. If you show them high repayment potential then there are better chances of getting your loan application approved.
3. C for Capacity
Banks consider this aspect among the most important ones. They want to check whether you will be able to repay the loan within the time limit or not. To ensure this, they closely analyse your business plan, credit score and repayment history. If the business you are planning to start is still in the idea phase then your loan application might be declined as lenders cannot see defined or clear revenue generation prospects. In such a case, you can apply for personal loan or loan against property.
4. C for Collateral
It is another way of making sure that the borrower is bearing some amount of risk with the bank. Banks believe that applicants who keep real estate or other assets as collateral are serious about repaying their loans. Banks would be willing to pay you a loan if you can put up an asset, that has a value more than or equal to the amount of the loan, as collateral.
Also Read: How to get collateral-free MSME loans
5. C for Cash Flow
This is also an important factor considered by banks. They are eager to know your income and expenses to determine your repayment capacity. They want to ensure that you have enough cash flow every month so that you can meet your credit obligation.