Small and Medium Enterprise (SME) units play a crucial role in the development of modern business and keeping the supply chain intact. However, they are most vulnerable during an economic downturn or weak macro outlook. This makes it challenging for an SME unit to get access to funds from financial institutions as business loans and the approval process also gets demanding.
However, you can overcome all such challenges and get an SME loan approved at attractive terms by understanding these key factors that play a crucial role in the loan approval process.
Credit score plays a critical role in the loan approval process. If the owner of the SME unit or the SME itself has a low CIBIL score, the lender will reject the business loan application outright.
Therefore, the first step is to repair the credit score for both- the owner and the business. Some of the deciding factors for calculating credit score are the length of credit history, repayment history, outstanding debt, credit utilization ratio, and debt-to-income ratio. Please note that depending on your business, your business credit score rating will also play an extremely important role in securing such loans.
The best strategy to improve business credit score fast is to maintain a credit utilization ratio of less than 25%, timely repayment of existing debt, have a stable income, and maintain an impeccable record of repayments. You should be very careful about your business finances. Even a single instance of cheque bounce can derail the entire loan approval process.
In case, the business credit score is minus one, which indicates an inadequate or short credit history, it is better to build a healthy credit history before applying for a business loan. Having a healthy credit history helps improve the chances of SME loan approval. Please note that most lenders, like Fullerton India require applicants to have a minimum CIBIL score of 750 to be considered eligible.
Lenders prefer advancing loans to businesses with stable income sources and that can provide an assessment of the performance of the business in the next three to five years, based on facts. It helps the lender to assess the credit risks involved in advancing a loan to the SME.
Therefore, before applying for a business loan, make a sensible financial projection based on current sales and profitability trends. The business plan should include- an overview of the company, financial projection, and analysis of the market.
Also, lenders look for a capable and experienced management team at the helm of the organization. And, how their decisions have fared for the company.
Before approving a business loan, the lender assesses the liquidity position of the business to ensure timely loan repayment capacity. Therefore, you need to maintain a healthy cash flow and keep the Debt Service Coverage Ratio (DSCR) within the prescribed limits.
DSCR indicates the liquidity position of the business for debt servicing.
If the cash flow position is a little off the track, by taking the following steps, you can improve the liquidity position of the business:
A strong cash flow position is considered favorable for business and increases the chances of business loan approval. Also, it helps to get a lower interest rate on business loans.
Before advancing the loan, the lender would want to understand your repayment capability. Therefore, before applying for a business loan, have a detailed repayment strategy and how you are going to fully repay the loan within the timelines. It gives the lender a degree of comfort and builds trust with the SME business owner.
Use our business loan calculator to determine the right loan tenure and the EMI amount that you will be comfortable paying without affecting the cash flow position of the business. A proper business plan and repayment capacity help to maintain transparency and saves a lot of time and effort for both parties.
By ensuring, your business stands perfect on all the four factors that are discussed above, you can meet the business loan eligibility and significantly increase the chances of SME business loan approval.
Furthermore, if you want to speed up the process of business loan approval, you need to provide all the relevant documents while applying for the business loan. It gives an impression to the lender that you are well prepared and clear on how you will utilize the business loan amount.
Also, by putting yourself in the shoes of an investor, you can introspect whether as an investor you will invest your hard-earned money in the business. It will give you much clarity on the things that you need to work on and feel confident about raising the funds from the lender to achieve the business objectives.