When it comes to business loans, financial institutions want to ensure repayment in a smooth and seamless fashion. Defaults in payments make things tough for lenders by adding on to their NPAs. Most Banks/ NBFCs take into account Capacity of the applicant, Collaterals presented, Capital available, applicant’s credibility and prevailing business Conditions while assessing loan applications. However, unsecured business loans are an exception to this guiding principle where loans are disbursed in the absence of Collaterals.
As a result, companies and individuals applying for unsecured business loans need to be top-notch on all the other facets which Banks and NBFCs consider for loan approval. The obvious question that comes into the borrowers’ mind is- How can you ensure that your application for unsecured business loans is approved smoothly and conveniently? Well, the answer lies in details but it is not as complicated as some of you might perceive.
The Ideal Plan of Action for Business loan Applicants
When you apply for a business loan, your approach must be highly comprehensive. You should find out about the factors that decide the fate of business loan applications. At the same time, you must gather information about the different types of business loans and the chief points of distinction between them. It will allow you to choose the best product for your requirements.
Some research about the approval policy of different financial institutions where you are applying for business loans will also be highly beneficial. In fact, it can allow you to bridge the missing links and shortcomings in your application. So, the more you research the higher will be the chances of your application being accepted.
The fact that banks/ NBFCs approve loans without collaterals/ security means that they are taking a bigger risk. As a result, unsecured business loans are disbursed at higher rates of interest. Hence, prospective borrowers must assess whether it would be sensible to pay EMIs of greater value for the same loan amount when compared to loans with collateral.
How Do Banks Assess Unsecured Business Loan Applications?
Different Banks, NBFCs, and other financial institutions have their internal criteria for loan approval. However, some vital factors are generally considered by all lenders. These intricacies and nuances often create the line of distinction between successful and rejected applications. So, let’s take a look at some of the crucial business loan assessment parameters:
- Turnover and net worth- The net worth or turnover of businesses enables financial institutions to analyze the repayment capacity of businesses. Banks/ NBFCs usually take into account the turnover of a company in order to make their assessment. In any case, the turnover of your business not only matters in the acceptance or rejection of your application but also when it comes to the determining the loan amount that can be disbursed as per the internal criteria of lending institutions.
- Creditworthiness of the applicant- All prospective borrowers, should attempt to have a strong Credit Score; preferably above 700. For the approval of your unsecured business loan applications, this is often the ‘make or break’ factor. A robust credit history with a track record for timely payments will enable you to get unsecured business loans from most financial institutions.
- Debt to Equity (D/E) Ratio & Debt to Income (D/I) Ratio- When applying for unsecured business loans, you must assess the D/E and D/I ratios of your business because it is a crucial factor from lenders’ point of view. All financial institutions prefer to approve applications of companies having lower debts and higher incomes and greater equity. Businesses with debts higher than income or equities find it tough to obtain unsecured business loans.
- Longevity of business- Another vital factor that all financial institutions take into account is the number of years for which your business has been operational. If you have been in business for a substantial amount of time, your credibility in the eyes of the lending institutions goes up by several notches. Businesses functioning for more than 3 years having turned decent profits would be the ideal applicants for unsecured business loans. On a strong contrary, newly established businesses find it hard to obtain unsecured business loans- even those with excellent ideas and a lot of potential.
- The performance of your business- It is one of the obvious facets of unsecured business loan eligibility criteria. If your business has a healthy balance sheet and is generally performing well, the likelihood of loan approval will be boosted to a great extent. If your company has optimum liquidity and the revenue aspect of the business is healthy, your application would have a higher chance of approval. Companies earning steady profits in the past few years find it easy to obtain unsecured business loans from most lenders.
As a conclusion, we can safely say that the approval of unsecured loan applications depends on the above-mentioned parameters along with the quality of your pre-application research. We, at NDF, partner with our clients in their research and provide them with a comprehensive understanding of policies adopted by financial institutions to maximize the chances of loan approval.
Prospective borrowers having proven repayment history with well-placed key financial ratios along with desired levels of liquidity are always more likely to obtain unsecured business loans.
It doesn’t matter whether you are on the verge of starting a business or making attempts to expand it, the need for additional funds can’t
The COVID 19 pandemic has severely impacted different facets of the Indian economy. The MSME sector is no exception and has taken a significant hit.