SMEs are a fundamental pillar of the Indian economy currently employing around 40% of the working class and contributing almost 45% to the GDP. This sector is responsible for 45% of total manufacturing output and 40% of total exports in India.
Business funding is expected to have 11% CAGR in the next 2 financial years according to CRISIL Research. As of 2018, the total market for business lending in MSMEs is approx. Rs. 14 Lakh Crore.
The rise of NBFCs has changed the financial scenario in India and made it considerably easier for small businesses to avail loans.
However, competition is severe with new businesses starting up every day. Many can be influenced by external forces that can drive them to bankruptcy. Thus, lenders are cautious whom to fund and whom not to.
If you are planning to avail financing, you need to ensure that your business has the worthiness and credibility to repay. More importantly, you need to showcase your business is creditworthy to the lenders for the final assistance.
Here are some of the factors that can have an impact on your business’ funding ability:
- Credit Score
A good credit score is the key to smooth business financing. The credit score is dependent on your credit history. The credit history contains all information related to your availed credits like your repayment records and if you have paid them within due date.
Your credit history will have a positive impact on your score if pay your credit card bills and loan EMIs in time and also handled them responsibly.
The ideal credit score for availing business finance is 750 or above. Some lenders also provide lower business loan interest rates to customers with such a score.
- Income tax returns and business turnovers
You have to file income tax returns and audit your business turnovers by a CA. This is a vital business loan eligibility criteria you need to fulfil before you apply for the loan. Usually, you will have to do these for at least the previous year to qualify.
- Business plan and financial statements
A sound business plan will have the most power to convince the lenders. Generally, a business plan highlights your future position and what you will do to achieve them.
Your financial projections outline your business’ future position. For that, you will have to provide your balance sheet, profit and loss statement, cash flow statement, and several other such records.
A business plan must also include your organisational structure, your core team members, your marketing strategies, how much funding you are opting for, how you are going to use the funds, etc.
- Debt-to-income ratio
Financial institutions prefer you have a debt-to-income ratio of 50% or less. It means all your monthly fixed debts like other loan EMIs, credit card bills, obligatory expenses, etc. are not more than 50% of your income.
Keeping a low ratio will help you get attractive interest rates and make it easier for you to pay your business funding EMIs.
- Business vintage
Financial institutions prefer businesses that have a vintage of 3 or more years. For validating the same, you have to provide supporting documents or proof of business. Documents like trade license, GST certificate, a certificate from Registrar of Companies, Articles of Association, Memorandum of Association, SEBI registration, partnership deed, etc. are some that you can furnish.These business data are crucial to get your business loan approved. Lenders offer extra benefits while availing loans. One such benefit is their pre-approved offers on business loan, pre-approved offers make the process of availing a loan easy and save time.