What Are the Eligibility Criteria for Obtaining a Business Loan?

Starting or expanding a business in India often needs some external funding. The necessary capital can be acquired through a business loan, but it is imperative to understand the business loan eligibility criteria used by lenders to evaluate applications before one applies for them.

Demands and loan terms vary from lender to lender, but some things remain constant. Small business owners’ start-up founders, as well as seasoned entrepreneurs, should be conversant with them. This familiarity helps them to plan ahead.

Let’s break down the main business loan eligibility requirements for getting a business loan in India:

1. Business Vintage: How Old Is Your Business?

Lenders mostly prefer operations that have been ongoing for some number of years. Have you ever wondered why so? Well, a business that has been running for some time makes the business’ track record less risky and ensures its financial stability.

• Standards: Most facilities need companies that are at least two or three years old.

• Significance: Longer duration implies having passed through initial hardships, thus having established income streams that are not likely to change significantly over time.

A majority of startups might find it hard to get access to funding from mainstream sources such as banks because they are unable to show enough profits or business vintage.

2. Revenue & Profitability as Financial Indicators.

In order to determine if your company can repay the loan, creditors need proof of how much you make and spend. For this purpose, they consider the business turnover. This is basically the total money received by an enterprise within 1 year. While some lenders consider a fixed rate of ₹10 – ₹ 20 lakh, others show some flexibility in these expectations.

Lenders also check if your business is making profits consistently. If this is the case, then your business will have a better chance of getting loans from most lenders.

It is also important that you present your financial statements to the lender, especially because sometimes, profit varies widely over different periods of time in a business.

3. Past Financial Behavior and Credit Score

If your CIBIL score is over 700, loans tend to get approved faster. This is because this high CIBIL score is proof of good borrowing practices and basically assures the lender that you can repay the loan on time.

4. “Will I Have To Provide Any Collateral?”

Not all kinds of loans require collateral. However, some other loans may demand collateral, especially at higher borrowing levels.

There are two types of secured loans — collateral loans and non-collateral loans.

While unsecured loans don’t need security, the interest rates and business loan eligibility criteria for such loans are high.

Such firms may also choose to get unsecured loans when they meet other conditions required in addition to their small sizes or levels of development.

5. The Actual Use of the Loan – How Will You Use The Money?

Figure out why you need the loan anyway. And for what purpose? You should share with the lender the following details:

1. The purpose of the loan that you’ve taken – whether it is to expand, work capital, or purchase equipment, among others.

2. Revenue projection of your business.

3. Your loan repayment strategy.

When depositing your business plan, make sure you are honest with lenders about everything and open when looking at future growth and handling financial issues.

6. Is All Documentation in Order?

In order to gauge how well you follow the law and finance, lenders usually look into this aspect. Make sure you have the following:

• Registration of your business (MSME, LLP or Private Limited Company).

• GST registration

Another thing that can reduce the chances of getting loans is the lack of regular tax payments, which can be controlled by using a tax saving calculator so that you are able to plan and follow up on all financial obligations.

7. Age and Experience of the Applicant

Before approving a loan, lenders also consider the personal background of an individual.

• It is required that applicants should be at least 21 to 65 years old.

• However, having run the business for some years might make it less risky for lenders to give out loans.

• A new would-be businessman might face close examination. However, an excellent business plan and financial statement will be great to convince a lender to give you a loan.

8. Existing Debts and Liabilities 

1. Before giving out a loan, the lenders will check if there is any financial burden or outstanding loans with you at the moment.

2. For one to get another loan, the existing debts are also looked into, especially if you have taken many others previously.

3. Thus, before applying for a new loan, it is advisable to clear up all your outstanding debts or merge them into a single one that is manageable enough for you.

9. Required Documents

If you have the right documentation, then you can speed up the approval process. Typically, these are:

• KYC documents: Aadhaar, PAN, voter ID, etc.

• Financial documents: Balance sheet, profit and loss statements

• Bank statements: Last 6-12 months

• ITR documents: Last 2-3 years

Updating the documents will prevent any delays in taking out the loan.

The Bottom Line

In conclusion, one must understand what it takes to qualify for a business loan application before going ahead with the process. Factors that lenders look into include business vintage, your business’ current financial health, the collateral value and your creditworthiness.

Lastly, maintaining an up-to-date financial record and tax compliance will help increase the chances of securing good loan terms for the funding you need.