Apart from a successful and proven track record the other three factors that decide whether you qualify for a loan or not are a good and steady cash flow, a favorable debt to equity ratio and carefully prepared and ordered documentation. Whether it is a small business or a private individual who has applied for a loan, the basic determining factors are more or less the same for all.
Net Cash Flow And Debt
The cash flow is the first thing that a lender looks in a loan applicant as it is the only source for repayment of the loan. For individuals it is the various sources of income but for business it is slightly different. It does not mean the profitability of the business or the assets of it because the sales that are booked may show up as cash in a later stage after the loan is received. Similarly, purchases shown are just mere entries but may be actually paid later. Therefore, the lender calculates your current financial position and the amount of cash that is available in hand during the time of application for the loan.
Required Net Worth
This minimum net cash flow must come up to 1.25 the debt that you require to receive a loan, the higher is better. The lenders want to be very sure before giving a loan and therefore look in the previous history of such amounts of cash flow and not just for the past two months. If you have a higher ratio and a history for a longer period of time you are inclined to get a loan easily and faster as well. Therefore, you must have a very steady and high cash flow for really a long time.
Debt Equity Ratio
Debt equity ratio is another important factor for you to qualify for a loan. This is a ratio which is calculated by taking all the liabilities and dividing it by the equity. If it is a unit ratio it means that for every dollar in equity there is an equal amount of debt and if the debt equity ratio is zero, it means there is no debt. This ratio can vary in different types of industries. In a capital intensive industry it will be higher as compared with other industries and it is for the policy of the lenders to decide whether or not to accept or reject the loan application.
Carefully Prepared Documents
Last but not least, you must have all the documents in order and place to get the loan. Apart from the basic documents of identity and proof of living, for business owners the documents must also include loan proposal to justify the loan, business plan and details of other debts. Sometimes, innovative plans having high potentiality for success can carry enough weight and help to cover a slightly low ratio to qualify for a loan.You can check online to know more about documentation.
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