When a small business applies for a loan, the lender follows some guidelines to assess the business loan eligibility of the applicant. The lender uses the 5 C’s of credit review to measure the loan application. Before allocating a certain amount of funds, lenders analyze the small businesses in the context of the 5 C’s. Ensure your business loan application addresses all these points so you can get the business loan approval easily.
- Character
Character refers to the possibility that a business will repay the loan. Sometimes data for the ‘Character’ comes from the business credit history. It also incorporates the business credit score produced from the reports. These reports comprise of details of earlier borrowing arrangements – incorporating entire amounts taken and paid back, and also lapses and late payments. The reports also incorporate particulars of liens, judgments, and accounts in collections returning through 7 years.
- Collateral
Collateral is one of business loan requirements which refers to types of security you can give your lender. Your collateral may be personal assets like house or equipment possessed by your small business. This may also incorporate an assurance by somebody else that, if you can’t pay back the loan, the other party will. Traditional lenders like banks basically need you to show collaterals to finalize your business loans eligibility.
- Conditions
Lenders closely consider Conditions. Sometimes, conditions are uncontrollable. They incorporate such things as the industry trends, economy, political circumstances or pending legislation. If you are seeking how to get a business loan, you will have to clarify why your business is assured to develop, how the financial ambiance will affect you, why your industry is powerful, and how you will fulfill the challenges of every possible political or legislative action. This means doing some economic studies, possibly making a business strategy which shows how your business will accomplish in upcoming years, and investing in some market reviews.
- Capital
The business capital is related to the creditworthiness of a business. The lender analyzes the business capital to realize the circumstances whether the business can repay the loan or not. Hence, the lender checks how much fund is spent on that specific business. The business’ higher capacity describes that the loan is considered to a secure company. The business capital is also measured by a loan’s down payment. The optimal down payment helps the lender keep faith on the borrower.
- Capacity
Capacity is the capability of repaying the money taken from the lender. Before a lender provides business finances, they will need to check some proofs or documents required for business loan approval to make sure that the business owner earns sufficient money for making payments on the loan. Hence, Capacity is the evidence that the business has ample cash flow to not just repaying the loan but also for covering all operational costs, obligations, other debts, and paying the salaries of its staff members. To measure the capacity of a business, lenders will check the business’ financial ratios and financial statements, incorporating:
- Income statement
- Cash flow statement
- Payables turnover ratio
- Accounts receivable turnover ratio
- Inventory turnover ratio
- Debt-to-tangible-net-worth ratio
- Present ratio
- Debt-service-coverage ratio
- Debt-to-income ratio
Lenders may also grant your managerial ability when it comes to assessing business capacity. This is your professional experience and business know-how.
Final Words
In a nutshell, the 5 Cs of Credit are an easy way for lenders to determine whether you are a trustworthy borrower or not. Every C is a distinct analysis of whether you will pay back their loan of fail due to poor economic timing, mishandling, other debt obligations, or something else they can predict. Getting an insight into what your lender is seeking will help you know how to get a business loan in India. And most importantly, a properly made business loan application will certainly help you borrow a better loan amount for your business.