Praveen Paulose, MD & CEO, Celusion Technologies

Born in 1978 in Mumbai, Praveen completed his schooling from St. Mary’s High School, Mt. Abu(Boarding School in Rajasthan).He completed his Bachelor of Engineering in Computer Science from D.Y. Patil College of Engineering, Mumbai. After a brief period of employment, he became a first generation entrepreneur when he started Celusion Technologies.The idea was based on the premise that they could build great software but today their software is changing the way people look at finance.

 

Many of us dream of running our own profitable small business. No matter how much money you have saved to start your business, you may end up needing additional funds. For your business to flourish and be profitable, you’ll need decent business credit to obtain financing. A business credit score is a testament to how well you manage your finances and how likely it is that you will be able to return a loan once taken, within the predetermined time frame. Since business loans are of substantial amounts hence the bank ensures their return with possible interest. A decent business-based credit score acts as an answer to such doubts.

To mitigate the risk of lending to a defaulter, a good credit score of the business is determined based on a company’s debts and repayment history with lenders and suppliers. Legal filings such as tax liens, judgments, or bankruptcies are also taken into account in addition to the company’s operating history, business type, and repayment performance compared to similar companies.

Ability to repay: 

To ensure the repayment of the loan based on the proposed amount and terms, the financial enterprises evaluate past cash flow statements of the company to predict the future income generated from the operations. The ability to repay is also calculated by assessing the borrower’s total outstanding debt obligations, compared to the revenue required each month.

The ability of a borrower to repay a loan is determined by specific formulas utilized by financial enterprises. For example, firms providing business loans use a debt-to-income ratio, that measures the borrower’s monthly debt (e.g, credit cards, mortgages, etc.) as a percentage of his income. Debt to income ratios above a certain threshold are deemed high risk by financial institutions, resulting in a loan decline or altered terms of repayment that cost more throughout the life of the loan.

Capital of the borrower: 

When determining the creditworthiness of the borrower, financial firms also analyze their capital level. An application for a business loan is backed by a business owner’s investment, retained earnings, and other assets. If the borrower’s income or revenue were to cease during repayment, lenders view capital as a backup option to repay the debt obligation. 

Firms favour borrowers with massive capital as it indicates that the borrower is ready to incur monetary risk in the business by being involved in achieving a goal. When the borrower repays the loan with his or her own money, it gives them a sense of ownership, and this serves as an additional incentive to repay the loan on time. Financial enterprises calculate their capital as a percentage of their investment costs.

Financial Records: 

Financial enterprises also include past financial records while determining a good credit score. Firms evaluate past financial records to predict the future behaviour of the borrower. Each firm has its approach for determining a borrower’s financial record based on integrity, honesty, and reliability, as well as qualitative and quantitative approaches. 

The qualitative approach of determining a good credit score includes evaluating the age of the business. Business lenders often prefer to work with companies that are established for a certain period of time. Examining the applicant’s credit history or score, which is standardized by financial agencies, is a more objective method. Firms also validate financial statements including balance sheets, that look at the assets and liabilities (e.g., real estate loans, vendor credit, etc.), as well as bank statements and tax returns. When a borrower has a poor credit history or has previously filed for bankruptcy, their financial record is perceived as less appealing than a borrower with a clean credit history.

Economic conditions:

Financial enterprises also analyze economic conditions as well as the purpose of the loan while deciding the good credit score. Most business loan applications list working capital, equipment, or expansion as reasons for funding. This factor is evaluated through a qualitative approach. In addition to qualitative measures, firms also use quantitative measurements, like the interest rate, the principal, and the duration of repayments. Additionally, firms may also assess conditions that are beyond the borrower’s control such as economic conditions, industry trends, or potential legislative changes.

Collateral:

Firms also include collateral in their factors to determine the creditworthiness of the borrowers. Collateral is the personal assets that are guaranteed by a borrower as surety for a loan. Under personal assets, the business borrowers use tools or accounts receivable to acquire a loan. Secured loans are more likely to be approved than unsecured loans since the lenders can collect on the asset if the borrower stops making payments. Financial companies measure collateral quantitatively by its value, and qualitatively by what they perceive as the ease with which it can be liquidated. Collateral-backed loans are also known as secured loans or secured debt since financial enterprises find it less risky to issue these loans. Thus, collateralized loans will tend to have lower interest rates and favourable terms than uncollateralized loans.

Every financial enterprise applies its own approach while determining a good credit score of a borrower. But the ability of the borrower to generate cash flow to repay the principal and interest of the loan is held at primary importance. The credit report of the borrower becomes valuable over time. Hence, to determine a good credit score, the financial enterprises expect good practice and discipline from the borrowers as the significance of a good credit score is gradually increasing in the current scenario.

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