Fintech lenders with their technological capabilities have transformed the unsecured business loans segment. Thus, due to significant savings in costs from digital processes, these NBFCs are able to offer unsecured business loan at lower interest rates than banking channels.
Each NBFC has certain predetermined criteria based upon the satisfaction of which the business loan is extended to the loan applicant. The complete fulfillment of these conditions results in the sanctioned loan amount. Generally, the business loan amount extended ranges Rss 1 lakh to Rs 1 crore, depending on the suitability of the business model, financial performance, the loan amount applied for and the amount determined by the underwriting process.
The following are the factors which influence the disbursal amount on New business loans:
1. Credit Score
The lender is primarily concerned with the repayment capability of the borrower. Hence the credit score is one of the most critical aspects that are looked into by the fintech lender to determine fundamental eligibility to obtain a business loan. This, in turn, impacts the loan amount granted. A minimum score of 700 is essential to be eligible for a business loan. In case of a healthy score of over 750, the business loan would be extended on favorable terms with a higher loan limit. It must be noted that even an average credit score can get a business loan if the financial performance of the business is sound. However, the lender would extend a reduced amount in this case.
2. Vintage period
Many fintech lenders insist on a minimum business operating period of 3 years. However, in case audited financials of 2 years are produced, the loan may be granted to eligible borrowers. A relatively nascent business unit or a business in the fledgling stage is considered a risky entity by lenders as the business model is yet to be proved as being viable. Further, the unit might not have generated sufficient revenues to assure the lender of its repayment capability. Hence lenders may provide lower loan amounts to a new business or release funds in tranches. However, long tenure of operations does not guarantee a higher loan amount. The lender would look into the stability of turnover and profitability aspects.
3. Profits are vital
Regular and healthy profits are a winning point when it comes to obtaining a sizeable business loan. This is also sound logically as a high turnover business would need enhanced loans for big sized business deals. Ultimately profits are used to pay the EMIs on business loans. In the case of high-profit margins, the lenders would be willing to extend higher loans amounts. Many NBFCs also mandate a minimum turnover limit of Rs 40 lakhs.
4. Business fluctuations
Every business undergoes business cycles i.e. ups and downs in profitability. However, some industries are prone to frequent volatility. The fintech lenders would study the markets conditions prevailing in the economy and the impact on the sector in which the business operates, before extending the business loan. This would naturally have a bearing on the loan amount.
If the market is excessively volatile, the loan amount would tend to decline, and if there is a probability of short or long-term stability, the loan limit would be enhanced.
5. Assets matter
While unsecured business loans do not require collateral, it is advantageous to have a considerable asset pool. A significant asset base is a strong indicator of the viability and sustainability of the business model. A lender would be willing to extend loans of a higher amount to business units that boast of a decent asset pool.
Fintech lenders make use of business analytics, machine learning, and advanced customer insights before arriving at the most suitable loan amount for each loan applicant. Also, the advantage in case of unsecured business loans is that the loan amount does not have a restriction of the value of the underlying asset. Since the asset pledge condition is absent.