Maintaining liquidity is one of the critical aspects for every business as they constantly experience highs and lows. Most companies consider Business Loans to meet their requirements in this competitive world. Business Loans are a readily available credit facility provided by most lenders. The company’s needs vary from expansion to acquiring assets like land or new equipment, basic operating expenses, etc. Therefore, the Business Loan amount also varies.
Furthermore, how well a company meets the Business Loan eligibility determines the loan amount. If the individual and business credit score is excellent, lending institutions can offer as high as Rs 50 lakh against an instant Business Loan with flexible repayment tenure.
Determining the optimal Business Loan requires careful consideration and financial analysis. Let’s understand how a company can decide on the right loan amount considering crucial factors.
How to Determine an Optimal Business Loan Amount?
- Identify the Use of Loan and Funding Needs
Every business needs to identify the purpose of debt in the first place. Thus, understand the proceeds the loan amount is to be utilised for. It can be a purchase of commercial property or equipment, covering marketing or inventory costs, growth expenses, managing seasonality, paying for renovations, consolidating debt, etc. You must apply for a Business Loan based on the ultimate use of the disbursed amount.
- Analyse Current Financials and Create a Comprehensive Budget
Businesses should decide the loan amount based on the detailed budget and financial projections. Take a close look at business expenses, existing debts, identify revenue trends, profit margins, and cash flow to outline a comprehensive budget.
Covering loan payments every month should not be a burden. If so, apply for a Business Loan with a smaller loan amount. By understanding their financial situation, companies can estimate how much additional debt they can repay conveniently.
- Determine the Cost of Borrowing
Calculate how much the preferred Business Loan amount costs you. The primary factor that decides the borrowing cost is the interest rate. A high loan amount can increase the interest rate as it increases the credit risk for lenders. However, other factors also impact the loan rates, including borrower’s loan eligibility, loan tenure, business profits, and risk involved in the business-concerned industry. Additionally, you need to consider processing or other fees levied by the lender to determine the borrowing cost.
- Apply for a Loan after Assessing Business Assets
Lending institutions consider a business’s assets to sanction the desired amount. Company owners must determine an ideal loan amount based on business assets. Thus, evaluate the value of your assets. Various valuable assets may increase your chances of a larger loan amount approval.
- Evaluate the Repayment Capability
Businesses must evaluate their ability to generate sufficient cash flows from operating activities for timely loan repayment. Lenders use qualitative and quantitative metrics to determine the eligibility for a business loan. One of these is Debt Service Coverage Ratio (DSCR). Considering this ratio, lenders understand how big the Business Loan application they can accept for a business. Firms should apply for a Business Loan based on their DSCR and cash flow to cover loan payments.
These tips can help most businesses looking for a loan and want to determine an optimal loan amount.
Steps to Apply for a Business Loan Online
Leveraging technology, renowned lenders allow businesses to apply online for a Business Loan.
Here are easy steps to follow:
- Navigate the Business Loan Segment on the lender’s official website and choose a loan type based on your requirements.
- Check the lender’s eligibility criteria and understand if you meet the eligibility well. Fill in the loan application under the chosen loan.
- Upload the required documents as mentioned follows:
- Identity Proof (PAN, Voter’s ID, Driving License, etc.)
- Address Proof (Passport, Ration Card, etc.)
- Previous six months’ Bank Statements
- Proof of Continuation – Income Tax Return Acknowledgement/Trade License/Sales Tax Certificate
- Sole Proprietorship Declaration or Certified Copy of the Partnership Deed, Certified true copies of the Memorandum & Articles of Association (certified by the business Director) and the Board resolution.
- Income documents like the latest 2-years’ Income Tax Return (ITR) with computation of income, profit and loss account, and balance sheet for the last 2 years. These documents need to be submitted after CA certification
Lenders may ask for other documents also if required.
The lender will verify the application and documents and offer you customised offers on the loan amount and interest rate. You can accept the loan offer and receive the sanctioned loan amount in your account directly.
Applying for a larger Business Loan amount is tempting for most businesses. But ensuring the loan amount is within the repayment capacity is essential. You can explore loan options and choose the right loan amount based on eligibility, needs, repayment capability, and borrowing costs.