Selecting the right sources of finance is crucial in taking your business to the next level. But the lender assumes the risk in granting loans. Operational risk, credit risk, liquidity risk, market risk are some to name a few. This is when your lender analyses some key aspects of your business before granting you a loan. Let us have a look key factors that a lender considers before approving your SME loan –
The lender while approving a business loan application ensures you repay the loan. This is known as your capacity to repay an obligation of debt. When you apply for an SME loan, your financial institution checks your credit history. The lender evaluates on two points, the repayment of all your borrowings and your current debt. With these in consideration, debt service coverage ratio is calculated which helps in estimating your capacity to service the current debts.
There are times a business may fail in repayment of a business loan. This is why financial institutions seek collateral against business loans. The collateral to your business depends on assets under the possession. Along with it, the quantum of loan applied determines the value of the collateral to be pledged. However, in some cases, there is no requirement of collateral in case of an SME loan.
Some primary documents that are evaluated with your KYC while sanctioning an SME loan or MSME loans are the financials of your organisation. The financials represent how much capital the borrower has as compared to its debt. If the lender feels that there are too much of pre-existing borrowings, it may be risky to approve such an SME Loan. A higher amount of capital indicates the commitment of the owners to its business and it can be favourable for your business loan application. There might be cases where an owners’ finances may be checked and the lender provides an SME loan on the personal guarantee of the owner.
The economic condition of the industry in which you operate has a great influence on whether the financial institutions are ready to lend or not. At times there may be an industry-wide slowdown and in such a scenario if there are borrowings, the financial institutions will be reluctant in offering loans. This is not due to any shortcomings of the borrower, but the potential for a downfall in industry and eventually having the loans go NPA.
These are some of the factors that a lender considers while approving your SME loan; make sure you select the best business loan while expanding your business. Compare among various lenders for SME Loan Interest rates before finalising to avoid any hassle of repayments.
