How Lenders Determine The Loan Limit For An Online Seller

E-commerce in India is growing at a rapid pace. It’s a highly competitive space as it gives opportunities to thousands of small sellers as well as big brands. However, to compete with the larger players, several sellers face the challenge of sufficient capital.

Be it in day-to-day operations, meeting sudden demand rise or to build a brand value, capital is all that you need to keep your venture growing. Loans are one of the most convenient financing options available for most online sellers. This is to expand their business and to manage gaps in cash flow. Be it a big brand or a small seller, financial backing is much needed to grow on e-commerce platforms.

Leading e-commerce companies have tie-ups with many financial institutions such as banks and NBFCs. These partnerships help encourage sellers on e-commerce platforms by providing them finance, mainly in the form of working capital.

Many financial institutions are working in collaboration with e-commerce companies. They have rolled out financing schemes for their online merchants and sellers. Lenders collect the database of sellers from the partnered e-commerce company. They then determine the quantum of loan and the interest rate for the potential borrower. Usually, loan amount varies from Rs 1 lakh to 100 lakhs.

Some lenders offer higher loan amounts depending on the pattern of the business. These e-commerce loans are offered to online sellers at a competitive rate with flexible repayment tenures.

Interest rate offered varies from 11% to 15 %, depending on the various factors and business record of the seller. It involves a quick and easy application process and minimum documentation.

E-commerce loans can be applied online through a simple process of form filling. Approvals are instant in most of the cases. Seller should be registered with the respective e-commerce company to avail the financing scheme. Usually, e-commerce loans are unsecured loans, i.e. loans without any collateral.

Lenders focus on many records related to the seller. Here are some of the Influencing factors based on which lenders determine the quantum of e-commerce loan:

1) Cash Flow Management: 

When you are selling products online, it’s important to ensure healthy cash flows. Online sales are quite difficult to predict, especially during the festive season and on big sale days. Failure in your marketing strategy can leave you with a lot of inventory that you could not sell. Seasonalities are common in the online selling business. You may end up facing cash flow problems, which ultimately lead to a financial crunch. Effective management of cash flows is a vital element. Lenders take your cash flow forecast statements into consideration while determining the loan limit.

2) Past Record:

Lenders take into consideration the entire business record of the seller since inception of the enterprise. Some of the documents taken into consideration are:

  • Business license,
  • Incorporation or registration details
  • Timely payment of sales tax etc.

The lender will then check your business plan and the performance since inception. They do this to understand the pattern and size of your business. So, be mindful of maintaining a good business record right from the onset.

It’s important for online business owners to keep their records updated. With good records, you may get a preferential rate on credit.

3) Operational History: 

Numbers of years in business counts more in getting the e-commerce loan approved. Generally, most of the financial institutions provide e-commerce loan to online sellers with more than a year of operation. The biggest fear for lenders when providing loans to online sellers is the possibility of default. Hence, stability of business is taken into consideration. Your entrepreneurial experience plays a major role in getting a credit facility for your online business.

4) Return on Sales: 

The efficiency of your business is measured basis the return on sales. Lenders consider the ratio of profit and sales to determine the credit limit that they can offer. The loan amount is determined by lenders based on your sales records of the last six months.

5) Type of Business: 

A lender decides the percentage of finance that they can offer to an online seller. It depends on the type of business. If your business is fast moving and the frequency of buying such products is more, you are likely to get higher loan.

6) Customer Satisfaction and Review: 

Earning customer loyalty and trust is key to being successful in online selling. The first impression of a seller needs to be good for customers to consider purchasing from the seller. Positive customer feedback will ultimately lead to more business. This creates more demand in the online marketplace. Customer review and rating defines your service quality. This helps you in building brand loyalty on the e-commerce platform. High customer satisfaction will ultimately boost your sales. This creates competitive advantage for you in the online marketplace. Lenders consider these elements to evaluate the level of your service quality.

CONCLUSION

With many e-commerce companies collaborating with financiers, availing credit for online businesses is no longer a challenging task. As lenders partner with e-commerce companies to offer customized finance solutions to e-sellers, more opportunities are available for new entrepreneurs to explore the online selling business.

Raising working capital for an online business is now convenient. It has become easy with the financial assistance from e-commerce companies.

With the help of details like:

  • Cash flow forecast,
  • Number of years of business experience,
  • Profitability,
  • Sales volume
  • Customer satisfaction report, etc.

Financial institutions are able to underwrite e-commerce loans for online sellers.

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Three Ways to Improve Your Business Credit Score

Small business owners often have to go an extra mile to ensure the consistent growth and success of their ventures. They must work hard in dealing with their customers and suppliers. They also need to come up with innovative ways to market their products and services. In their efforts to polish the customer-facing, technical and marketing aspects, small and medium enterprises (SMEs) often overlook the attention that their creditworthiness requires, which is vital to their chances of getting business loans.

If all goes well for the business and it is able to get a constant stream of customers, its position in the industry will be strengthened. This, in turn, opens doors for business finance from banks, conventional non-banking finance companies (NBFCs) and the new age NBFCs in the form of FinTech lenders. However, a few clever methods help in improving the prospects for business funding.

If you are an entrepreneur with a promising business idea that is backed by adequate possibilities for success, you must take it forward. To improve your chances of getting a loan for business expansion, here are the three points that you can pay heed to:

1- Make timely payments on your bills and clear outstanding credit 

Financial discipline is the key to success when you are managing a commercially motivated organisation. In business, you may have to make regular payments to your suppliers and vendors. These ought to be made on time.

With frequent delays on the payment of your outstanding invoices, you may hurt your prospects for being qualified for business loans. A late payment on bills can damage your financial records, particularly if it gets reported to business credit scores rating agencies such as CIBIL.

If you had missed a couple of payments, but later managed to catch up with the regular cycle, the delayed payments may have had some adverse impact on your credit ratings. However, the damage is not permanent. As credit scores are a reflection of activities over a period, it can take some time for the new data to set in and replace the older information. The credit score will gradually improve to reflect your eligibility for business finance.

The focus should be on making payments on bills before they are due. This is not only a good habit that will help your business get higher credit ratings, but will also improve your relationships with the suppliers and vendors. If you have severe financial constraints, you can use strategies such as invoice financing. (Link to relevant product page can be placed here)

In addition to the bills raised by entities dealing with your company, payments on credit cards and existing loans should also be made on time. Most importantly, keep all the receipts against payment safely in your records.

2- Use credit prudently

The FinTech revolution has given access to fast business loans and has made it convenient for SMEs to expand their presence in the market. If you can demonstrate the ability to use your loan for business wisely, it will only improve your business credit rating and will help you borrow bigger amounts in future.

Funds must be used for the purpose that was stated to procure them. If you have taken a loan for business activities – such as paying a vendor, buying raw material or inventory, refurbishing a storefront – it must be used accordingly. Do not use business finance for personal expenses. The mixing of personal funds with those for business can happen unknowingly at times, especially for start-ups and sole proprietorships, but the two should be separated as soon as possible. This helps in improving the credit history records considerably.

Another point to understand here is – if your business has credit accounts in good standing, but you barely use them, do not be tempted to close such accounts. They may come to the rescue of your business plans in future. What is more, the closure of any account trims down the total amount of credit that may be available for your company, and conversely, increases the ratio of credit utilisation stats – this change of numbers will negatively impact the credit score.

When the debt load is haphazardly scattered in multiple accounts, you should work on reordering it so that there are smaller balances on different accounts. Once you are able to make regular payments on them, it will gain you credit for paying off more than one outstanding balance.

3- Avoid taking hasty or risky decisions 

When you are managing a business and dealing with people from different fields every day, you will have your own experiences and learn to do things differently. Keep a vigil on the financial situation of your organisation even if you have hired accountants to manage your finances. Decide upon the figures that you aim to achieve and know what it will imply for the health, bottom line and future prospects of your business. This helps to maintain focus and financial discipline.

Avoid the risks that can affect your business credit scores. Some activities such as dealing with other companies of dubious nature not only harm your brand image, but also deter your business finance providers. Keep away from inherently risky operations that can cause financial stress in future.

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SME Financing Options and Some Common Mistakes

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2.Wrong Estimation of Funds Required: Most business owners feel anxious about overestimating their loan requirement and having to pay interest on excess funds. This makes them lean towards underestimating their costs. Thus, even when a loan is disbursed, these businesses are left wanting for more. Of course, the overestimation of the loan requirement hits the bottom-line.

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5.Trying to Arrange Collateral: SMEs sometimes put too much at stake to get a loan or do not borrow money in the absence of collateral. Capital Float offers small business loans in India without the requirement for collateral. One can also opt for a Merchant Cash Advance, which converts accounts receivables of a business to quick and usable funds.

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