Understanding the Important Aspects of Business Loan Eligibility

To run a business effectively and smoothly, owners require adequate funds. A business requires different kinds of funds such as owned equity, working capital, secured and unsecured loans. For business expansion or any long-term objective, businesses require a business loan. Apart from long-term capital, a business also requires short-term capital for daily routine activities and operations. A working capital loan is an unsecured loan required to run the business operations smoothly. Such loan deals with the daily cash problems of the business. A working capital loan is for a short tenure up to 4-6 months whereas a business loan is for a longer tenure.

Working capital means an excess of current assets over current liabilities. A business needs a working capital loan when current liabilities are more than current assets. It is an unsecured loan taken by a business to meet the liquidity needs such as payment to suppliers, payment of salaries, buying raw material, store inventory, managing seasonal demands, etc. These are short-term loans payable easily when funds are available. But when funds are needed for business expansion or purchase of plant and machinery or large investments, a business loan is suitable. It is a long-term loan that may be secured or unsecured repayable in monthly installments at a specified rate of interest to the lenders.

Purposes of a Business Loan

Business loans are available for individuals, start-ups, business owners, self-employed professionals, entrepreneurs, and MSMEs needing funds for seamless operations of the business, business expansion, purchase of plant and machinery, managing debt or cash flow, payment of salaries, or bills.

Eligibility Criteria for a Business Loan

A business loan is available both with and without security. Business loan eligibility depends upon the risk-taking ability of the lender. Many banks and financial service companies offer business loans for starting a new business or expansion of existing businesses. To get a business loan, the borrower has to furnish the necessary documents to meet the eligibility criteria.

  1. The business should be an LLP or private limited company. The net income of a business should be more than Rs. 1,50,000 p.a. to get a loan of Rs. 15,00,000. For a business loan of up to 15,00,000, the net income of a business should be more than Rs. 3,00,000. Your income criteria determine your repayment capacity to the lenders. A business with low earnings may not get a higher loan amount at an attractive rate of interest.

  1. It should be a partnership firm or a proprietorship firm. You may run a business solely or with partners, both are eligible for a business loan online. You must have a registered partnership deed to prove your partnership firm.

  2. The borrower can be a self-employed professional or a chartered accountant. You must possess a degree or diploma in any of these disciplines such as art, craft, or a particular profession such as dental surgeons, accountants, engineers, craftsmen, contractors, etc.

Determination of Business Loan Eligibility

Business loan eligibility is determined with the help of important parameters that include the CIBIL score of the borrower, business records and statements, credit utilization ratio, tax records, etc. If you are going for a business loan application, you must check that –

  1. Your CIBIL score must be within 750 – 900.

  2. Clean tax records with no defaults and red flags. If your tax records are clean, the probability to get a higher loan amount increases.

  3. Good payment records indicate your financial discipline as it also determines your eligibility for a business loan online.

  4. Existing business- Your business must be in existence for 2-3 years generating profits.

  5. Nationality- The borrower must be Indian and should not have made defaults in payments in the past.

  6. Age- Above 18 years of age

  7. Annual turnover- Your business should have a turnover of a minimum of 12 lakhs.

How to Improve Your Business Loan Eligibility

If you think your chances to get business loan offers is low, you can mend it following the given steps. You can get your business loan approved by doing the right things.

  • No error in documentation– When it comes to business loan requirements, lenders usually ask for important documents to review your business profile. The documents asked by the lenders must be submitted along with the loan application. If any of the documents are missing or fake, your loan application may get rejected. To avoid such a situation, make sure you have submitted all the necessary documents for loan approval. A seamless banking experience generates confidence among the customers. With online technologies, the process of business loans is effective in minimizing errors.

  • Honest taxpayer– Your probability to help receive a higher business loan amount increases when you are an honest taxpayer. It is essential to pay taxes regularly to avoid loan rejections. If you default, it hurts your image and credibility.

  • Profitability of business– If your business is continuously running in losses, your credibility in the market is adversely impacted. Hence, to become an eligible borrower, you must earn good profits in business. When the lenders scan your business turnover and records, the profitability of the business should be higher. If your previous records indicate lower profitability, your loan application may get rejected.

  • Future prospects of business– Lenders are willing to offer business loan low interest rate to those with good financial prospects in the future. If your business is stable and capable of generating profits, lenders may accept your loan application. But if your business is seasonal and demand is volatile, the lenders may or may not accept your business loan application. Before choosing to business loan apply, business owners should run their business effectively to generate higher profits.

  • Repayment capacity– Lenders take a risk when they provide a business loan to the borrowers. Especially when the business loan is unsecured, the risk is high. Hence, the loan is not sanctioned until the lenders ensure that the borrower would be able to repay the loan on time, which is one of the most important business loan requirements. The borrowers should make their payments on time to avoid loan rejection.

Documents Required for a Business Loan

  1. Duly filled application form with passport size photographs.

  2. All the KYC documents of applicants, co-applicants, or partners such as Aadhaar card, passport copy, driving license, voter ID card, utility bills, and PAN card.

  3. Last 6 months bank statements.

  4. Incorporation certificate of your business.

  5. Business records and a business annual turnover of minimum Rs. 10 lakhs for existing businesses.

  6. Other documents on demand by the lenders

Preferred credit score for business loan eligibility

Before applying for a business loan offers, you must ensure that your credit score must exist within 750-900. Your CIBIL score indicates your credibility and repayment capacity. When a borrower applies for a business loan, the lenders go through the borrower’s details and scrutinize to assess his or her credibility and business loan eligibility. If you have a low CIBIL score of less than 750, your loan application will be rejected as the score indicates that you will not be able to repay the loan. If your previous records show unpaid credit card bills or unpaid instalments, the lenders will not reject your business loan application.

The lenders also have to decide whether the borrower has to provide collateral security or not. If you have a very good credit score with great future prospects and a clean record, you may not have to furnish collateral security. But if the lender doubts your repayment capacity after assessing your profile, you may have to furnish collateral security.

Before applying for a business loan online, borrowers must ensure that they are eligible for a business loan. You may apply for a loan for both long-term and short-term purposes. You are eligible for a business loan only if the lenders trust your repayment capacity. Hence, maintaining a good credit score is imperative. Even if you have furnished all the documents, you will get a business loan only when your credit score is worthy.