While your credit score is a strong indicator of your credit behaviour, there are other pertinent factors influencing the approval chances of your unsecured business loan. Lenders gauge several metrics to determine your creditworthiness. Knowing these can help you prepare better and improve your odds of approval.
Cash Flow Consistency
Lenders need to trust you with EMI payments. It is important to exhibit a robust cash flow with consistent inflows in your bank account from sales, invoices or contracts. Even if your business is new or small, a steady cash flow signals financial stability. Irregular deposits or negative balances raise red flags.
Tip: Maintain healthy balances and avoid cheque bounces. They’re silent deal-breakers.
Business Fundamentals
It is not only investors who look closely at your business model. Lenders also want to be sure that your growth is not built only on deep discounts or over-optimistic projections. If your unit economics are weak, lenders see a higher risk in repayment. They also consider predictions regarding your business’s future revenue to gauge its potential growth.
Tip: Keep your numbers simple and easy to verify. Margins, customer retention, and recurring revenue are the signals that build lender confidence.
Existing Debt Obligations
Your debt-to-income ratio is a crucial determining factor for lenders. If you are already paying a large part of your income as debt, it signals that your finances are stretched thin. Lenders usually prefer a debt-to-income ratio below 50%.
Tip: Pay off smaller loans or think about combining debts before you apply. It makes your application stronger and shows you have room for fresh credit.
Transaction History
The way money moves in and out of your organisation speaks volumes about your credit health. Lenders check whether the vendors are paid promptly, if salaries are credited on time and whether your GST and taxes are filed properly and without delays. These details give them confidence that you run your finances responsibly.
Tip: Keep your banking history clear and well-organised. A consistent record can make lenders more comfortable extending credit.
Your Business Documents
Your business document will act as the fine print of your business. Keeping them up to date and error-free is of utmost importance. Even a single typo can halt your loan application.
Tip: Run a thorough check of all your documents. Fix errors before applying for a loan.
Essential Documents for Assessing Creditworthiness in Business Loan Applications
The following are the documents generally asked for by lenders for your business loan.
- Identity proof including PAN card, Aadhaar card, etc
- Applicant’s or business’s address proof, such as telephone bills, electricity bills, lease agreements, etc.
- Income or revenue proof
- Company’s financial documents, including the balance sheet, profit and loss statement,etc.
- Proof of business ownership
- Evidence showing the continuity of the business.
- Tax returns filed by the company.
The Takeaway
Your credit score may open the door, but getting the loan credited in your account will take more. Lenders will conduct a thorough due diligence of multiple factors, including your cash flow, business fundamentals, financial habits, etc, before extending a loan.