When a financial institution reviews your business loan application, it looks for all the details you mention, including the loan amount. A business loan amount usually varies between Rs. 1 lakh to Rs. 1 crore for tenure between 6 months and 5 years. It is important to assess your need for a loan before you drop a loan application. The amount you request for must not be more than what you require, as you will have to pay an interest on the borrowed amount.
How to Analyze the Loan Amount for Business Needs?
- You can take professional help to account for the funding amount needed, such as a Chartered Accountant, who can analyze the financial position of your company, and assess how much money has to be allocated for each department, and henceforth.
- After the loan amount you need is determined, you can apply with a bank or NBFC. Do understand that the final call of sanctioning an amount depends purely on the bank/NBFC you have applied with.
- The sanctioned amount can be lower or higher than what you have applied for, and if the amount is higher, you can borrow only the amount that you need.
The loan amount the financial institution sanctions is influenced by various factors, and today, we will discuss these factors in detail.
- Credit Score
As a business owner, it is crucial to keep your personal credit score high. Your personal spending, debt ratio to income, and open loans will be analyzed to determine your creditworthiness. Personal credit score is more of an importance, when your company does have enough vintage or the profit margin is low, or if you want a loan for a start-up.
- The credit history of your company also matters. You can get a loan with a score as low as 500, but the rates charged would be high, compared to that if your credit score is 700+. The best way to ensure that your credit score remains high is to make regular payment towards loans and credit card bills.
- If you delay or miss any payment, it will impact your credit score. Credit score influences the loan amount. Higher the score, greater will be the approved amount, and vice-versa.
- It is advisable to check your credit report for any errors, get the same fixed, and check your current credit score, before you look to apply for funds for your business with any financial institution. In case you have a low score, then you can opt for alternate funding options.
- Business Vintage
If your company is less than two years in existence, then it will be considered as a start-up. A new business may not be eligible for a traditional bank loan, as banks typically prefer firms with vintage of at least 3 years to lend an amount. Companies with greater vintage and financials will receive a higher loan amount, than otherwise. The longer a business has been operating, the more are the loan options offered, and vice-versa.
- A company that has been operational for three years and more has the best chance of availing finance not only from banks and NBFCs, but other channels and investors as well. These funds can cost low as the rates charged would be standard than higher.
- If you must borrow funds, ensure that the debt will not hinder the company’s operations, and you will be able to generate sufficient cash-flow to repay in time. In case you are unsure about cash-flow and stability of income, then you can approach investors and sponsors instead of a traditional bank.
- Companies with vintage of less than two years, usually have to pay a higher APR (Annual Percentage Rate). Businesses that have been operating for more than 6 months can also get a loan through alternative lending market place.
- The amount of money provided here, depends on the monthly revenue of the organization. The financial position of the firm will be strictly scrutinized to sanction a loan amount.
- The Revenue
To qualify for funding, a company must meet the annual turnover requirements as stated by the financial institution. Some banks and NBFCs may want to check out the monthly revenue than annual one. Usually, annual turnover of Rs. 50 lakhs is required to avail a business loan. Generating sufficient amount of revenue necessarily does not mean you will receive the funds, as there are other eligibility criteria to meet.
- Sometimes, the average daily balance of your company’s bank account also determines the loan quantum that can be provided to you for a particular tenure. So make sure your business bank account always has sufficient balance.
- Especially a small businesses, must maintain an average daily balance above the total monthly payment amount, or they would not qualify for the loan. The higher the average daily balance, greater are the chances of securing the desired loan amount.
- Or otherwise, a lower amount of loan can be offered, so that you can maintain the monthly payback amount. But this in your favor, as any fiscal stress can disrupt the existing finances of the company.
- Collateral
Though an unsecured business loan is widely available and almost every bank and NBFC offers it, there are loans that require collateral as well. If you wish to choose a collateral backed loan for your company, then you must check which type of security the financial institution will accept.
- For instance, some banks accept deposits based on your merchant processing or bank account as collateral.
- Other option could be a real estate property you own or investment stake at a reputed company. The value of collateral will influence the amount of loan. Collateral is utilized to make a lender trust you with providing loan.
- If a need arises to liquidate the collateral on failure of repayment, the security will act as a medium to make you accountable to pay back the loan.
To Conclude
So, when looking for an ideal business loan amount, you must keep the above-mentioned factors in mind, before applying for funds with a bank or NBFC.
