Eligibility Criteria for Business Loan
Business loan eligibility criteria are nearly the same across all domestic central & private banks and even non-banking financial institutions. To qualify for a business loan, business owners and their businesses need to meet these requirements. Here’s a look at them.
- Loan applicants must be of Indian origin.
- Applicants should be self-employed individuals, sole proprietors, associates in partnership firms, or owners of private limited companies.
- The turnover requirement varies across lending institutions. For example, HDFC Bank demands a minimum annual turnover of Rs. 40 lakhs. On the other hand, many banks that cater to small businesses require a minimum turnover of Rs. 10 lakhs.
- The business owner and the existing business must have a CIBIL score of 685 or higher. The credit score requirement also varies across institutions.
- The age of the loan applicant is at least 21 years and should not be more than 65 years during business loan maturity.
- The business should have a minimum annual income of Rs. 1.5 lakhs for loan amounts of Rs. 15,00,000; higher for higher loan amounts.
- Applicant must have a minimum of 3 years of business experience and 5 years of experience.
- The business must be profit-making for at least 2 years. Some banks and NBFCs need the applicant business to turn a profit for at least 1 year. Applicants need to submit profit statements to their lender.
- An audited balance sheet also crucial to business loan eligibility. Applying businesses must have their balance sheet audited by a registered chartered accountant.
Significant banks and NBFCs entertain specific preferences regarding business loan applicants. Certain lending institutions entertain a particular customer profile while others prefer another type. All in all, all kinds of domestic banks & NBFCs in India consider the three profiles below for a term or business loan:
- Self-Employed Professional: They range from chartered accountants & doctors to company secretaries, architects, management consultants, etc., any person who’s practising some profession.
- Self-Employed Non-Professional: This category includes contractors, traders, manufacturers, commission agents, and any person not particularly educated in their profession.
- Permissible business entities include limited liability partnerships, proprietorship firms, and limited & closely limited companies; in short, any business with a good credit history has a good annual turnover and consistently makes profits.
The business loan eligibility criteria, permissible loan amount, required documentations, interest rates, loan tenure, and the necessity of security — all such terms and conditions vary across categories and differ by customer profile & business conditions. Therefore, a company must find the right lender for the best loan scheme and the right business loan amount.
How to Find the Right Loan for Your Business
Finding the right loan is all about diligent research, foresight, and understanding how the debt funding figures into your business plan.
- Plan Things Out: Chalk out a detailed plan. Think about how the loan amount helps you out and how quickly & efficiently you can start repaying while keeping your business running strong. Understand the risks involved, be aware of costs & revenues, and remember to maintain healthy working capital. Be clear about why you need a loan and have a business plan ready, as lenders will enquire about the purpose of the business loan.
- Choose The Right Loan Amount: Deciding how & why you need debt financing and the amount necessary are crucial decision-making factors. Identify these factors minutely. How much debt can the company carry? What is the maximum loan amount that you can take out? How much time will it take to repay the loan amount?
- Shortlist Multiple Lenders: Having multiple options at hand is always great. Look at what different banks and NBFCs are offering. Go through their terms & conditions, analyze any specific nuances of their eligibility criteria, check interest rates & repayment periods, and then take your pick.
Check the lender’s reputation before making your decision. Avail of one that offers competitive interest rates, flexible repayment schedules, an easy approval process, and is generally considerate towards their clients.
- Be Aware of the Processing Period: Lenders will have different application processing systems. If you want a quick disbursal and avoid the hassle of a convoluted process & extensive documentation, research the application process & look at the approximate time it takes for the funds to arrive.
- Develop Your Loan Application Carefully: Once you have decided to get a business loan and where to get it, it is time to craft a loan application that assures instant approval. A typical loan application must clearly depict the business owner’s profile and showcase the business plan that requires financing.
The loan application must be accompanied by all necessary business loan documents & the applicant/owner’s identification & financial documents, etc.
Documents Required for Business Loans
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Thoroughly filled application form
- Two passport-sized photos
- Address & identity proofs such as PAN card, Aadhar Card/ Voter’s id card/ Utility Bills/ Driving license, passport, etc.
- The ownership documents required include agreement copy, share certificates, declaration of a sole proprietorship, article of association, etc.
- Business continuity documentation such as registration & incorporation certificates, GST Certificates, and bank statements for the last six months;
- Copied income tax returns of the last two years (essential for self-employed professionals, private limited companies, and partnership firms);
- The business’s profit & loss statements and balance sheets for the last 2 to 3 years, duly audited by a registered chartered accountant;
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The applicant’s income proof for the last six months.
How can I Improve my Business Loan Eligibility?
Business loan eligibility depends upon specific factors, some direct and others somewhat indirect. Chances of approval improve drastically if a business addresses those factors intelligently while approaching lenders for a business loan.
- A Stable Business: This is one of the most apparent and significant reasons. Whether an unsecured business loan or a loan against property, lending institutions always look into profitability and stability. They will check bank statements, audited balance & profit statements, annual income, turnover, and every other aspect indicative of stability and prosperity. Lenders will look closely at a business’ debt service coverage ratio, a metric that measures how well the business can repay its loans. But, proper planning and efficacious financial management can help boost liquidity, thereby improving the ratio and business loan eligibility.
- A Credible Credit History: The importance of a good credit score can not be emphasized enough. The better a business’s credit score and the more impeccable the credit history, the better their eligibility and the higher the minimum loan amount. Defaulting on debts, irregular payments, and fraudulent activities can drastically damage an establishment’s reputation and credit history.
- A Proper Plan & Profile: Having a plan, purpose, and perspective is necessary. Lenders will enquire about the purpose of taking out a loan and scrutinise business requirements. Every lender will want to know how a business intends to use the money and understand whether the company will be able to pay installments timely till the time of loan maturity. Business owners must have a clear vision of why they need a term loan, the business loan amount, how to make the best use of it, and how they can repay the entire loan with interest. All in all, a proper business plan and repayment strategy are must-haves
- Miscellaneous Essentials: A cordial relationship with the lending institution can be beneficial. Also, it is best to seek the services of a professional while crafting a loan application. Timely EMI payments, credit cards & other bill payments improve credit score and business loan eligibility. Check our business loan EMI calulator.
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Business loan eligibility can also suffer if multiple lending institutions reject the loan application. Therefore, if your application has been rejected, it is advisable to wait for some time before re-applying elsewhere.
It is best to look for lenient financial institutions that offer quick approval & require minimal documentation. Choose a service with competitive interest rates and check eligibility criteria for nuances.
Comparison of Business Loan Eligibility Criteria Across Different Banks/NBFCs
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Tata Capital
The applicant’s minimum age should be 25 years, and the maximum age limit needs to be 65 years. Businesses must be churning out profits for at least 3 years. Turnover should be at learn Rs. 40 lakhs and increasing with time. Income tax returns filed should be no less than Rs. 30 lakhs.
- HDFC Bank
The business loan eligibility criteria for one of India’s largest private banks require businesses to have a minimum turnover of Rs. 40 lakhs. The applicant must possess a minimum of 3 years of experience in the current firm and five years of overall business experience. The business must profit for at least two consecutive years and have a minimal annual income of Rs. 1.5 lakh per annum. The applicant’s age must lie between 21 & 65 years.
- ICICI Bank
Getting a business loan from ICICI bank becomes simpler if a borrower already has a bank account with ICICI and a personal loan, property loan, or a four or two-wheeler loan availed through the bank and good standing in terms of credit history. However, other aspects of the business loan eligibility criteria remain the same.
- Axis Bank
To get a business loan from Axis Bank, businesses must be three years old and have a minimum turnover of Rs. 30 lakhs. They must have wholly owned or rented office or residential property with residence stability of minimum 1 year and office stability of at least 2 years. Individuals must have a minimum income of Rs 2.4 lakhs as filed in their income tax returns for the last 2 years. Businesses must showcase a minimum profit of Rs. 30 lakhs in the last 2 years.
Factors that Determine Business Loan Eligibility
- The CIBIL score
- Any loan defaults and/or irregular payments
- The applicant’s creditworthiness and repayment capacity
- The applicant’s income source and financial history
- The nature & type of the business and the financial profile
- The purpose and plan behind taking out business loans
- Years of existence and business turnover rate
- A well-crafted business loan application and proper business loan documents
FAQs
The Government of India, certain domestic central & private banks, and even non-banking financing corporations offer an array of attractive startup funding schemes for any up & coming small business, online business, and the like.
The value depends upon how well an applicant meets the business loan eligibility criteria. As eligibility criteria vary across banks and NBFCs, the business loan amount also varies.
The minimum annual turnover to become eligible for a business loan differs from lender to lender. In most cases, it is something around Rs. 40 lakhs.
The average minimum interest rate offered by most banks or NBFCs is 16% per annum, which can vary depending on how well a borrower meets the business loan eligibility criteria.