Factors That Determine Your Approved Business Loan Amount
Business loan can help a business to grow and sustain. But it can be difficult to estimate the cash requirement of any business based on the other. So, there is many factors that contribute to determine the loan amount.
Business loans can help to sustain and grow a business. But no two businesses are alike and it would be wrong to estimate the cash requirements of one business based on the other.
The loan amount depends on the individual business goals and finances. Additionally, there are a host of factors that determine the amount of funding required for a business. Here are a few of these factors.
Credit Score:The credit score is the first parameter that lenders check while considering a loan application. It reflects the creditworthiness of an individual based on the personal credit history in terms of previous debt payments. Applicants with a high credit score are deemed as low-risk borrowers. An excellent credit rating not only helps to get the desired loan amount from the preferred lender but also a lower interest rate.
Cash Flow:Lenders carefully monitor the projected cash flow to assess the financial health of a business. Cash flow in a business determines the money available to repay the loan after other expenditures have been covered. A history of positive cash flow means the company is earning more than it is spending. A negative cash flow resulting from lower profits, lesser seasonal demands, over-investment, high overhead expenses, overstocking and poor financial planning is an indication of cash shortages and financial difficulties.
Business Plan:An effective way to convince the loan provider about the needed loan amount is by preparing a realistic business plan. Business owners must prepare a detailed business plan stating the purpose of the loan, the company’s goals and the way the loan will be utilized to achieve it. A business plan should also include steps of loan repayments.
Type Of Business:Lenders prefer businesses that have proven themselves over a period of time. Also, some businesses carry higher risk than others. The lender may not be convinced to fund the total loan amount required to run a riskier business.
Collateral:Founders of a company can get the desired loan amount sanctioned if backed with some form of collateral like property, business inventory, cash, bonds, vehicles and equipment. The collateral acts as a guarantee empowering the lender to seize the asset if the borrower defaults on a loan.
Down Payment:Lenders look for commitments in businesses, and for borrowers the best way to assure the lender is to provide a large down payment.
Current Liabilities:A large unpaid debt may be a warning about the business owner’s probable inability to afford the future monthly payments. Apart from these, there are a number of external factors like the monetary policy of the country and inflation that can also affect the business loan terms.
Several internal and external factors together determine the business loan terms. Securing a loan on favourable terms may seem difficult but borrowers can take a number of steps to improve their chances of getting a loan.
A high credit score, a strong business plan, a large down payment and a collateral are among the factors that can help a borrower secure the desired loan.