Factors Affecting Business Loan Terms - Business Loan Blogs by Finserv  MARKETS

Business loans play a significant role in enhancing the performance of a business. It helps in inventory management, expansion, working capital planning, and equipment maintenance. In such a situation, you need to be aware of certain factors critical for getting a loan. Many factors that affect the terms of a business loan are controllable. Other factors due to external circumstances are beyond control. Obtaining knowledge about all those factors helps increase the chances of loan approval.

Features of business The size of an organisation decides the tenure for which a lender would get a loan. The type of business also influences the business loan eligibility criteria. Certain business operations that are riskier do not earn favourable loan terms. Some financial institutions have turnover eligibility conditions.

Age of applicant Most financial lenders have an age eligibility condition of 21 years and above. But some lenders need a minimum age of 25 years and allow a maximum age of 65 years to lend. So, your present age at the date of availing of a loan is a crucial factor impacting the terms.

Business Plans – You must be worth enough for the risk taken by lenders in providing your business with financing. To assure your competence and business potential, submit an efficient and detailed business plan. Such a plan helps lenders understand that their money is in safe hands. The lender checks the purpose of borrowing a loan. They can also ask about the repayment plans.

Collateral Collateral is the requirement of a secured loan and not of an unsecured loan. Lenders approve secured business loans more often because they can seize the assets offered. Such a seizure of collateral occurs when the borrower fails to pay back the loan. Sometimes, the absence of collateral results in extra interest and fees or a shorter repayment period. Applicants with poor credit and lesser business history may not qualify for unsecured business loans.

Quantum of Down Payment A substantial down payment is necessary to show lenders your dedication to the business. Lenders provide good terms to applicants who make sizable down payments. This step also signifies your ability to pay timely instalments of the business loan.

Proper documents – Submission of accurate and complete documents provides a good insight into the business history. This factor helps in allowing beneficial terms for the business loan. Your business loan application might get rejected if you fail to show the documents required by a lender. 

Credit Score – An individual credit score also affects loan terms, similar to the business credit score. A thorough credit check is the primary action of almost all business lenders. A poor credit score increases your charges and interest rates on a business loan. Sometimes, exceptionally-low credit scores can disqualify a person from getting a loan.

Recent business history This time-in-business requirement may reduce the market share for lenders. Since most businesses require additional financing before the three-year mark, a less stringent lender would ignore such a requirement and gain a competitive advantage. It is significant to acknowledge that the period your business has been up-and-active can impact your loan terms. It’s hard to get a standard business loan with a low-interest rate without a long and successful track record.

External Risk – These are things beyond the control of the business and borrower. It includes Industry risk and Technology risk. Also, Demand and Supply for loans are part of macroeconomic factors affected by various country-specific regulations. General Turn of events in the economy like pandemic is also the reason for impacting the business loan terms.

You can choose a loan term that is suitable for your company by managing controllable factors. By such an approach, one can achieve a loan with favourable terms.