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Business Loans

Business Loan Eligibility Criteria in India

Are you looking for a business loan? In this blog, you will learn about every single criteria that’s needed to apply for business loans in India

As per the business loan eligibility criteria in India, you need to have a Minimum Annual Income (ITR) of 1.5 lakhs annually. Also, you should be at least 21 years old at the time of loan application and not more than 65 years old at the time of loan maturity. 

A business loan is financial aid provided by banks or other lenders to businesses. The purpose of these loans is to provide capital for new projects, equipment purchases, expansion, etc. Business loans come in several forms, such as term loans, revolving lines of credit, and commercial paper. These types of loans offer varying interest rates and terms. Business Loans are usually secured against assets owned by the borrower. This means that the lender has the option to repossess the collateral if the borrower fails to pay back the loan.

A bank loan for start-ups is a fantastic idea, it can also be used for starting a traditional firm in service, manufacturing, or commerce. Even though there has been a lot of buzz about an angel or private equity investment in recent years, bank loans continue to fund the majority of enterprises in India. An entrepreneur can receive a business loan for a startup with the help of a solid banking system and a network of leading Non-Banking Financial Companies (NBFCs). We will look at some of the most important business loan eligibility criteria in this article.

Scheme or Product Compatibility

Banks, unlike equity investors, have a robust structure and method for granting or rejecting bank loan sanctions depending on a variety of factors. As a result, before applying for a business loan, the Entrepreneur should familiarise himself with the various business loan schemes offered by the bank and apply for the appropriate one. 

For example, several banks provide the MUDRA Loan Scheme, which provides budding entrepreneurs with an unsecured business loan of fewer than 10 lakhs. A new entrepreneur who applies under such a scheme is more likely to succeed than one who applies through a scheme where the entrepreneur does not fulfill the bank’s lending standards.

Business Loan Eligibility Criteria

Age Requirements: Minimum age is 18 years old.

Eligible entities: Individuals, SMEs, MSMEs, Sole Proprietorships, Corporate Entities, Public and Ltd In Companies, Limited LLPs, Retailers, Traders, and Manufacturers involved in services, trading, and manufacturing.

Vintage Business: Profitable for at least a year

Experience in the business world: Business location must be the same for at least one year.

Yearly Turnover: Annual Turnover

Credit Rating: 750 points or more

Nationality: Any previous loan(s) with any lender should not default on by Indian citizens.

Additional Requirements: The applicant must own a home, office, shop, or godown.

Documents

Bankers use procedures when processing loan applications and need a specified collection of documents to complete a bank loan proposal. As a result, to be eligible for a bank loan, the Entrepreneur must assemble and submit excellent documents to the banker. The following is the documentation required for a business loan application:

  • Financial Forecast 
  • Financials in CMA Format (Credit Monitoring Arrangement Format)
  • Letter of Request for a Business Loan 
  • Certificate of Incorporation (If a Corporation or Limited Liability Partnership)
  • Partnership Agreement (In case of Partnership Firm)
  • Copies of the Promoters’ IT Returns 
  • VAT Registration / Service Tax Registration (if available)
  • Promoters’ Bank Statements 
  • Collateral Property Valuation (if applicable)
  • Collateral Property Legal Opinion (if applicable)
  • Promoters’ Assets and Liabilities Statement (if applicable)

The above list is illustrative. Relating to the credit profile of the bank loan application, the banker may seek more or less information. Submitting the required documents does not guarantee loan approval. The above documents must supply, and the banker’s credit assessment will base on variables.

What is the purpose of obtaining a business loan?

Individuals, entrepreneurs, startups, self-employed experts, innovators, and MSMEs who need additional financing for working capital, business expansion, machinery/equipment, paying off rent, salary debt, or managing business cash flow might benefit from business loans. However, each bank and NBFC has its own set of business loan qualifying criteria that applicants must meet to submit a successful business credit application.

Several factors determine the eligibility for a Business Loan.

The following are the primary elements that influence Business Loan eligibility:

  • Individual’s age 
  • Business nature and type
  • Applicant’s financial history, source of income, and credit score 
  • Business turnover and vintage 
  • Individual’s repayment capability and credit 
  • Business stability or viability 
  • Any loan defaults that have occurred

Unlike angle or equity investors, bankers seek for-profit and solid cash flow when deciding whether to lend. Bankers do not own any stock in the company and are only entitled to interest on their borrowed money. As a result, bankers would disregard the business’s long-term profitability and positive cash flow, which expects to create in the future. After the first setup time, bankers are more likely to support profitable proposals and have positive cash flow. As a result, as a borrower, you must demonstrate that your firm is performing well and that your operations are not profitable but also generate enough cash to pay all your financial obligations.

FAQs

1) How does your salary affect your ability to get a business loan?

The applicant’s income is critical for obtaining a business loan. It provides the lender with a sense of confidence and reliability that the borrower will be financially sound on time and without defaulting.

2) What is the minimal annual turnover for a company loan application?

The minimum yearly turnover necessary to apply for and qualify for a business loan varies from lender to lender. However, if you apply for a loan through paisabazaar.com, it is ₹12 lakhs.

3) What is the lowest interest rate that banks or NBFCs offer?

The interest rate on a company loan starts at 16% per year and can go higher based on the needs.

4) What is the maximum loan amount for a business loan?

The company loan has a minimum loan value of ₹30,000, but the loan amount can go up to ₹1 crore, which might exceed the requirements.

5) What is the minimum credit score to qualify for a business loan?

Banks prefer credit scores of 750 or above on a scale of 900. The bank scrutinises the applicant’s credit history during the loan application process. If your credit score is below 750, the bank may charge you a higher interest rate.

6) How does a person’s background affect their chances of getting a loan approved?

Yes, background information might hurt your chances of getting a loan. If the bank discovers that you have any fraud convictions or other criminal history, they will deny your loan application.

Conclusion

Most bank-supplied business lending programs necessitate the creation of primary security using funds provided by the banks. If a business loan is taken out to machinery, the machinery refers to be primary security. If a business loan is taken out for working capital, the raw materials and receivables will be the principal security. If a loan defaults, the Banker would be able to hypothecate and sell the primary securities to recoup losses.

Banks prefer projects that result in the creation of strong primary collateral that can be easily hypothecated and sold by the bank.

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