1 Minute Business Gyan – Day 4
When running a business, ambition often fuels our decisions. It’s easy to believe that confidence, intent, and willingness are all that matter when facing major financial commitments like term loans. But as any credit professional will caution, true affordability is a number, not a feeling.
Let’s dive into a story that exposes the “illusion of affordability” and equips you with practical frameworks to protect your business’s financial health.
The Reality Check: More Than Just Good Intentions
Recently, an entrepreneur approached me for a business loan. “I can pay a ₹40,000 EMI easily,” he declared.
But our review of his actual cash flows told another story:
- Gross profit: ₹70,000/month
- Operating expenses: ₹35,000/month
- Family drawings: ₹20,000/month
- Net cash left: ₹15,000/month
Despite his willingness and confidence, the numbers couldn’t justify the ₹40,000 EMI. In fact, he was ₹25,000 short each month.
Why Willingness Is Not Affordability
Many entrepreneurs combine willingness to pay with ability to pay. But in business finance, the only affordability that matters is what your cash flow supports after covering every necessary expense. If your EMI is larger than your true monthly surplus, you’re not just stretching yourself; you’re putting your business at risk.
Consequences include:
- Postponing vendor payments
- Dipping into emergency reserves or personal savings
- Missing EMI dues
- Damaging your credit score
- Potentially slipping into the dreaded NPA (Non-Performing Asset) category
How Lenders Really Evaluate Repayment: DSCR Explained
Credit officers don’t rely on gut feelings. We look at hard numbers especially the Debt Service Coverage Ratio (DSCR).
What is DSCR?
DSCR=Net Operating Income/Total Debt Service
- A DSCR of 1 means you generate exactly enough cash to pay your EMI.
- A DSCR below 1 means you do not generate enough to cover your obligations.
If a loan applicant’s DSCR is under 1, that’s a red flag. For most banks, this means instant rejection, regardless of confidence or intent.
A Practical Framework: Calculating Your EMI Buffer
Before you apply for a loan, use this formula:
Net Profit – Business Expenses – Personal Drawings = EMI buffer
Your EMI should never exceed this buffer. In fact, it’s wise to keep a 20–30% cushion above your expected EMI for unexpected costs or business slowdowns.
Best Practices for Sustainable Borrowing
- Never take on an EMI bigger than your monthly surplus.
- Always build in a cushion: Financial unpredictability is part of running a business.
- Calculate everything: Don’t let optimism lead you into a dangerous commitment.
Final Thought: A Loan Should Empower, Not Endanger
Business loans can fuel growth, but only if you borrow wisely. Let your cash flow guide your choices not just confidence. Remember:
Take only what you can comfortably repay. A good loan supports your business; a bad loan suffocates it.
Share this with anyone considering a business loan, and let’s build more resilient, sustainable businesses with pride, not pressure.
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