The 5 Cs to Consider when applying for a Business Loan
With the economy growing fast, new businesses are also coming up every day and so is the need for business loans. Business Loans are lines of credit extended by banks or NBFCs to companies for setting up new business, working capital requirement, expansion, equipment purchases etc. However, to get your business loan approved easily, you need to take care of the 5 Cs of credit which are: Credit Score, Capacity, Collateral, Conditions and Capital.
- Credit Score: This is one of the most crucial factors which lenders consider before extending credits. Credit score depicts your credit history and likelihood of default. A lower credit score may attract higher interest rates, stricter scrutiny, and sometimes straight rejection.
CIBIL score is the most widely used estimating of credit score and ranges between 300 to 900. Availing credit on a CIBIL score of less than 500 can be really difficult. - Capacity: The capacity of a business is its ability to repay a loan. The higher capacity you have, the more favourable can be the credit terms. Lenders assess a business’ capacity by evaluating their Debt to Income (DTI) Ratio.
DTI ratio = Total Debt/Total Income
This ratio compares monthly loan payments to monthly income and the lower the ratio, the higher is your capacity to repay a loan. - Collateral: It refers to the asset which is used as a security against a loan. The higher the value of a collateral, the higher is the loan amount you can avail. Usually assets like property, plant & machinery function as collateral. However, financiers may offer only up to 70-80% of the market value of the collateral and the rest amount need to be arranged through other means.
- Conditions: This refers to the purpose & terms of the loan and external factors like economic & industry factors which have an influence on the state of business and an impact on business loans. Favourable conditions make it easier to secure loan. Though a business cannot control its external factors, however it can be prepared to weather unfavourable market conditions.
- Capital: It refers to the tangible asset with which a business can repay the loan. It includes liquid assets like cash, money in bank accounts, investments, and possessions which a lender can seize.
Understanding why some businesses easily secure loans while others face rejection often comes down to the thorough borrower analysis based on the 5 Cs of credit. These criteria are a starting point, not a rigid rulebook, and should be adapted based on the specific industry, client size, and loan amount. Staying informed about evolving regulations and market trends is essential to refining credit risk management strategies. Building a robust credit risk management system that balances automation with human expertise is key to achieving optimal results.
In India, numerous commercial banks, public sector banks, and NBFCs provide business loans. These loans vary in type and purpose, making it crucial to select the financing arrangement that best meets your business needs. Given that each financial institution has its own terms, it is always advisable to check, compare, and select the best lender. Ideally, you should choose a reputable lender such as Red Fort Capital to avoid future hassles.
Red Fort Capital is dedicated to empowering Indian MSMEs (Micro, Small, and Medium Enterprises) on their path to business growth through customized business loans. We understand that securing a business loan in India can pose significant challenges, particularly when factors like a less-than-ideal credit score, a relatively short business history, unclear financial records, or variable cash flow come into play.
As a respected Non-Banking Financial Company (NBFC), we take pride in offering a diverse range of secured business loans, spanning from 1 to 10 Crores. What sets us apart is our remarkable ability to disburse funds fast, in just 7 days. Our financial solutions are meticulously designed to cater to a spectrum of needs, including working capital requirements, equipment and machinery purchases, invoice/bill discounting, and last-mile financing, among others.
Indirect Tax Benefits to MSMEs
In order to reduce compliances for MSMEs, following schemes are in place under GST Act, 2017-
Composition Scheme: This scheme was introduced to reduce compliance and paper work for small businesses. It allows MSMEs having yearly turnover upto Rs.1.5Cr to file quarterly returns with GST liability rates ranging 1-5% instead of the prevailing rates of 18% generally. This helps to manage the working capital efficiently. To opt for this scheme, it is essential to have operation within a state as inter-state transactions are not covered. Opting for composition scheme prevents from taking input tax credit. This GST liability cannot be charged to customer. It is an out-of pocket expense for the business.
Example: A manufacturer with operations in Maharashtra with annual turnover of Rs.1Cr can opt for this scheme with 1% GST liability to be paid on its own (without charging it to customers). Also, input tax credit on purchases cannot be taken.
Threshold Exemption: If the business has an annual turnover upto Rs.40 lakh (for goods in most of the States) and upto Rs.20lakh (for services), it is not mandatory to have GST registration. However, this would limit the business from taking input tax credits.
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About Red Fort Capital
Red Fort Capital is dedicated to empowering Indian MSMEs (Micro, Small, and Medium Enterprises) on their path to business growth through customized business loans. We understand that securing a business loan in India can pose significant challenges, particularly when factors like a less-than-ideal credit score, a relatively short business history, unclear financial records, or variable cash flow come into play.
As a respected Non-Banking Financial Company (NBFC), we take pride in offering a diverse range of secured business loans, spanning from 1 to 10 Crores. What sets us apart is our remarkable ability to disburse funds fast, in just 7 days. Our financial solutions are meticulously designed to cater to a spectrum of needs, including working capital requirements, equipment and machinery purchases, invoice/bill discounting, and last-mile financing, among others.
