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Understanding the 5Cs of Business Loans in India

Setting sail to any business venture requires unabated attention and more significantly, a constant flow of funds. Business owners consistently require funds to manage their many financial demands. While revenues do aid in meeting these demands, they can never solely satisfy the expenses a business is required to incur at the time of expansion, or even during a sudden catastrophe.

Business loans play the role of the ‘ultimate saviour’ during such times. While there are many options available, like moneylenders and close family members, business owners cannot entirely rely on them.

Established entrepreneurs and even small-scale business owners prefer taking bank loans for initial business financing and eventual company expansion.

But in order to take a business loan in India (just like anywhere else in the world), one must first follow protocol and adhere to the norms. Following which, the lender will evaluate the credit worthiness of potential borrower. Termed ‘5Cs’, this system gauges the five characteristics of a borrower in an attempt to ensure that the loans are repaid in full and within the stipulated time frame.

What are the 5Cs of Business Loans in India?

1.Character

The first C refers to the subjective judgement of the borrower formulated by the lending institution. This is based on the borrower’s overall background in the industry - business experience, education, past loan repayment records, bankruptcies (if any) etc. Relying on these factors, the lender decides if the borrower can potentially repay the loan.

2. Capacity

This is a crucial aspect for banks to adjudge as it assesses the borrower’s ability to repay small business loans or even hefty ones. A good credit score, impeccable repayment history and a well chalked out business plan with promising returns qualify as positive parameters to determine whether the loan can be repaid in full and on-time.

3. Capital

Capital refers to the owner’s own funds invested in the business. All banks are extremely averse to risk and need significant investment from the owner(s) before even considering approving loans for small business or even big firms.

4. Collateral

Collateral acts as the key to securing a loan in business finance; especially with higher amounts. Placing assets like real estate and machinery against the loan, gives sound assurance to the lenders and fetches a better business loan interest rate. After all, it serves as a secured loan.

5. Conditions

The bank’s decision to approve a loan is always linked to its intended purpose. They need to know how the borrower plans to use the capital, be it for business expansion or buying inventory. Loans are more likely to be approved when backed by a strong reason.

Understanding of the ‘5Cs of business loans’ is an integral part of the application process. After which, you can fulfil your dream venture by taking a business loan through a bank, financial institution or NBFC (Non Banking Financial Company).
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