The 5 Cs to Consider When Applying for a Business Loan

Running a business? Willing to apply for a loan to start or expand your business? Applying for a loan involves consideration of various factors. The key factors that matter when availing of loans can be summed up as the 5Cs of credit, i.e., Credit score, Capacity, Collateral, Conditions, and Capital. Each factor plays an important role. Let’s begin with understanding what are business loans and then explore the 5Cs of business loans.

What is a Business Loan?

Business loans are a type of unsecured loan that you can apply for business purposes. You can use the funds to finance your business-related expenses. Business loans have served as a crucial financing option for many businesses and have provided the much-needed capital for them to grow and flourish. However, before you apply for business loans, you need to consider certain important factors. These are popularly called as the 5Cs of business loans.

5Cs of Business Loans

Having understood what a business loan is, let’s understand the 5Cs of credit:

1. 1. Credit Score

It is one of the most important determinants for determining whether you can get loans or not. A credit score is a 3-digit numeric figure between 300-900 that takes into account your past credit behaviour and performance. The higher the credit score, the higher the chances of securing loans and negotiating favourable terms. An ideal credit score for a business loan is 700 or above.

1. 2. Capacity

The lenders consider the capacity of the borrower to repay the loan. This is determined by assessing your income tax returns, financial statements, and bank statements. Here, the lender evaluates the Debt-to-Income (DTI) ratio of the borrowers. It is calculated by adding all your monthly debt payments and dividing it by your gross monthly income. Total debt payments normally include all your EMIs as well as credit card bill payments.

Further, the income of the borrower plays an important role. The income of the borrower should be sufficient to meet the existing debt obligations and living expenses as well as the new debt obligations that the borrower is willing to raise. The EMI and interest repayments of business loans will further reduce your disposable income. The lender will assess whether there is enough disposable income available to cover this EMI.

1. 3. Collateral

Whenever you apply for loans, banks may ask for collateral security. This reduces the risk to the bank as they can use the collateral security to recover the dues in case the borrower defaults. The requirement for collateral security arises only in the case of secured loans. Unsecured loans like business loans, personal loans, credit cards, etc., don’t require you to furnish collateral security. This gives borrowers peace of mind to know that their assets are safe with them. As stated, business loans are unsecured loans and therefore, you don’t have to provide any collateral security.

1. 4. Conditions

Before applying for a business loan, you need to check the conditions based on which the loan is extended. Different banks have different conditions for granting loans. This not only includes the business loan eligibility criteria but other conditions as well.

1. 5. Capital

The amount of loan you wish to borrow can also be called capital. It plays an important role when applying for a loan. You need to determine the loan amount you need. Applying for a lower amount than you require will not serve the required purpose. However, if you borrow more than you require, then you may end up paying a higher amount of interest. It would help if you determined what goals you wish to fulfil through business loans and how much money is required for the same. This will help you determine the right amount of capital you need.

In a Nutshell

Most people rely on business loans to unlock the growth in their businesses. However, it is important to select the right lender before applying for one. IIFL Home Loans is one of the pioneering financial institutions that provides you with affordable business loans to help you start or grow your business. You can avail of secured business loans at affordable rates with a simple business loan application and easy to fulfil eligibility criteria. The flexible tenure option ensures that your business finances are not burdened. Apply for secured business loans now with IIFL Home Loans!

FAQs

Q1: Which is better – secured or unsecured business loan?

Ans: You can opt for secured business loans to get funds at a lower interest rate. If you don’t have any collateral, you can go for an unsecured business loan.

Q2: What are the purposes for which business loans can be used?

Ans: You can use business loans to make vendor payments, expand your business, buy equipment, bridge working capital, etc.

Q3: What should I check for while applying for a business loan?

Ans: You should check business loan eligibility criteria like age, income, etc. Other conditions you should check include interest rate, penal charges, prepayment or foreclosure charges, etc.

Q4: Are business loans a good option to expand your business?

Ans: Yes, many people have relied on business loans to grow and expand their businesses.

5: Are business loans expensive?

Ans: As business loans are normally unsecured, they carry a higher interest rate than secured loans. However, you can also apply for secured business loans.