Capital is the most important asset for a business to thrive. But there can be times when you might face fluctuations in cash flow which can lead to financial instability. During such times, for instance, you may fall behind in stocking up your inventory, paying the bills in time, giving your employees salaries, and so on. This is when you can reach out to banks for financial assistance and apply for a business loan instantly online.
Even though the process of applying for a business loan is quick and easy (and can be processed from any place possible), there are a set of business loan eligibility criteria that you are required to fulfill to become eligible for the loan at an affordable rate of interest.
Let’s read them below.
Steps to follow for qualifying for a business loan
Now that you have learned about your requirements for the loan, it is time to understand the steps you should take to qualify for a business loan:
- Maintain a good credit score
When you apply for a business loan, the lender will ask you to produce personal documents along with your business credit score. This will be their first step to be assured about your financial conditions and if you will be able to sustain the loan.
A good credit score will not only help you get approved for a loan but will also help you in getting a lower interest rate business loan. Some online lenders might qualify you for a loan even with a lower credit score, but usually, it varies depending on their requirements.
- Inform about your annual income
A lender will ask to produce your business’s bank records and income tax returns in order to verify your business’s annual income. You can either upload them manually or provide your lender the access of speaking to your bank directly to review your bank statements.
There is usually a criterion of having a minimum annual income from your business to qualify for a business loan. Additionally, the lender might also look into your profits gains to understand your earnings.
- Duration completed by your business in the market
A long-running business is more likely to get approval for a business loan than a new business because the longer the duration, the better your business’s credit score.
Although the minimum requirement of duration completed by your business may vary. According to the lenders, for instance, a regular bank will demand you to have been in operation for not less than two years, while an online lender will demand for at least 6 months to 1 year. Furthermore, the requirement may also vary depending on the type of business.
- Debt to income ratio (DTI)
Some lenders emphasise on getting an insight into your business’s debt-to-income ratio or DTI.
The lender will calculate your DTI ratio by dividing your monthly income by your total monthly debt. To be a potential loan borrower, you will have to have a lower DTI ratio as it reflects your financial situation and will prove to the lenders that you are or are not worthy of managing a business loan.
The debt-service coverage ratio, or DSCR, which compares your business's annual net operating income to its total debt, is another factor that certain lenders take into account.
You can calculate your DSCR by dividing your company's EBITDA by the total annual debt.
Note: Keep in mind that earnings before interest, taxes, depreciation, and amortisation are sometimes referred to as yearly net operating income (EBITDA).
- Pledge security for a business loan
Since a business loan is categorised as both a secured and unsecured loan, the lender may demand you to pledge security (such as your valuable property) in return for the loan borrowed.
This is done to get a personal guarantee from you as a borrower. Based on the type of loan borrowed, your security will be decided; for instance, if you have taken a loan for the purchase of raw materials or to invest in automobiles, then they will serve as security that the lender is eligible to seize in case of a default.
Calculate your business loan EMI instantly using the business loan EMI calculator available online.
- Determine the eligibility of your industry:
Your eligibility for a loan also depends on the type of industry you are working in because every industry comes with a different level of risk. For instance, some industries are exempted from being a part of financial assistance, such as gambling, etc.
It is essential to clarify the industry your business is a part of to meet the business loan eligibility criteria without hiccups.
In conclusion
Your business may require capital for many purposes. As such, you can apply for a business loan. The sanction of this loan will depend on the nature of your business, industry, credit score, and more. So, before you apply for a business loan, read all eligibility criteria carefully.