Business Loan Eligibility

A Business Loan is provided by banks, non-banking financial companies (NBFCs), and other financial institutions, solely for business operations. This could be for an existing business or even a new business. Business loans can be availed by proprietorship firms, partnership firms, limited liability partnerships (LLPs), or any type of organisation to fulfill the following requirements:

• To get additional cash flow to manage business-related overheads
• To purchase any equipment or tools for the business
• To expand an existing business
• To set up a new business venture
• For purchase invoices to obtain goods that are required for the business

Whenever a bank or an NBFC extends any finance to a business, they look for certain eligibility criteria. These are criteria that the bank makes use of in order to decide how viable the business is and what are the risk factors involved in extending the credit facility.

The eligibility criteria help the banks determine the following:

• The type of business: Certain loans are reserved for manufacturing units while others provide loans for both service-based businesses and manufacturing units. There are also exclusive loan plans that are reserved for micro, medium, and small businesses. This can be determined by eligibility criteria set by the bank.
• The qualification of the individual: With proprietorship firms, especially, banks require a minimum educational qualification or work experience based on the type of loan that is extended to them. This helps the bank understand if the individual is qualified to run the business and hence, make viable profits that will help repay the loan according to the terms of repayment set in the loan agreement.
• The viability of the business: In the case of existing businesses, the turnover of the business is an important factor for eligibility. In the case of new businesses, the projections made for the term of the loan help determine the viability of the business. Loans are provided to businesses that are carried out in industries that are profitable and also provide some assets to the bank in case of defaults in repayment. The viability of the business is a very important factor in understanding the repayment capacity. The more viable the business, the better the chances of the loan being repaid on time. In case the business is not as viable, the interest rates may be higher, and the collateral required may also be higher.

To increase the chances of approval on a Business Loan, the applicant should meet some business loan eligibility criteria. This may differ from one bank to another. However, there are certain factors that are common to most banks, as mentioned below.

• The applicant must be a Resident of India
• The minimum age for applying for a Business Loan is between 18 years and 23 years
• The maximum age for applying for a Business Loan is usually between 60 years and 65 years
• In the case of a new business, the projections should be as per the standards of the industry in which the business is functioning in.
• In the case of existing businesses, there is a minimum turnover that the business must have depending upon the type of loan that the borrower is seeking and the quantum of finance that he or she has applied for.
• For most Business Loans, the applicant should at least hold an undergraduate degree in the respective field of work or should have pursued any course that is applicable.
• The work experience required for any existing business is usually between 2 and 5 years.

Various factors affect the eligibility for a Business Loan. This not only determines whether the loan will be approved or rejected but can also affect the interest rate that is charged on the loan that is extended.

The most common factors that affect Business Loan eligibility are as follows:

• Credit Score: Each year, the Credit Information Bureau of India Limited, or CIBIL prepares a credit report for businesses and individuals based on their credit behaviour. Depending upon the number of credit facilities availed, the types of credit availed, the repayment history, and other factors, a credit score is provided. This is a number that ranges from 300 to 900. The closer the number is to 900, the better the chances of availing a loan. A higher credit score means that the individual or the company has a good track record and is a credible candidate to provide loans.
• The monthly income: Repayments of the loan are usually in the form of EMIs. This is why the monthly income is a very important factor in determining whether the individual and the business are eligible for a certain Business Loan. It helps the bank understand whether the individual will be able to make regular repayments based on the EMI calculated on the loan amount.
• The nature of the business: Some industries are more volatile than the other. The chances of getting a loan for a business in a more stable industry such as manufacturing consumer durables are much higher than in a service-based industry. The latter is not a need-based commodity, which means that fluctuations in business can be quite common. This may affect the repayment capacity. Therefore, the interest rate charged on loans provided to businesses in these industries is usually higher.
• The collateral provided: If the collateral provided for a loan is higher, it automatically migrates the risk on the part of the bank. As a result, the higher the collateral, the better the chances of getting approval and the lower the interest rates. The loan amount is also higher when the collateral provided is higher. The primary security based on the hypothecation of assets owned by the business is also a reasonable factor in determining the loan. If the equipment or assets are higher in value, the loan amount provided is higher and the interest rate is also usually lower.

As mentioned before, the eligibility criteria for each bank are different.

Here is a list of the top banks and their respective eligibility criteria for Business Loans:

To confirm that the applicant fulfills all the eligibility criteria required by the bank, certain documents are necessary.

The documents to be submitted along with your business loan application are as follows:

If you have decided to apply for a Business Loan, here are a few factors that you need to consider:

• The time in business to determine if the industry that you are currently working in will have any dips.
• The income that you are generating with your business currently to understand the repayment capacity.
• The cash flow available with the business
• The rate of interest offered on the loan
• The collateral that you will be able to provide, if needed
• The current debt load on the business and the repayment capacity based on EMI payable on these loans.