Business Loan Eligibility Criteria
Business Loan eligibility is something every business owner wants to know at some or the other point. To help our MSME friends with checking their business loan eligibility, here is a list of factors that banks and financial institutions in India typically consider while providing a business loan. Irrespective of the type of business loan – secured or unsecured, certain criteria need to be met to become eligible for the loan. Go through each and every factor individually to get a better understanding of how banks calculate the eligibility of the applicant.
New Business Loan Eligibility
|Nationality||Must be an Indian citizen|
|Age||Minimum 21, Maximum Not older than 65 years (at loan maturity)|
|Business Type||Self-Employed, Proprietary, Private Limited, Partnership, limited liability firms.|
|Industry Type||Manufacturing, Trading & Services|
|Business Vintage||1 to 3 years|
|Business Experience||1 to 5 years|
|Credit Score||More than 700 to 750|
|Debt to Income Ratio||Less than 50%|
Understanding Business Loan Eligibility Factors
Each eligibility factor of a business loan is explained in detail for better understanding.
Type of Businesses Eligible for a New Business Loan
- Self-employed Professionals like Doctors, Engineers, Chartered Accountants, Management Consultants, etc.
- Private Limited Companies
- Partnership firms
- Limited Liability Partnerships
- Non-farming Income-Generating Businesses
- Businesses involved in manufacturing, trading or services are given top priority.
Besides the type of business, lenders also consider the nature of the business and the industry. Some industries may be perceived as high-risk or volatile, leading to stricter eligibility criteria or higher interest rates. Businesses operating in established industries with a stable track record are generally viewed more favourably by lenders.
Age and Citizenship
The minimum age of the business owner or the loan applicant must be at least 21 years. The maximum age at the time of loan maturity must be 65 years. The applicant must be an Indian citizen. However, these age limits can vary slightly among different lenders.
Business Vintage & Experience
Business loans to start a new enterprise do not require any vintage. Existing businesses applying for a loan to expand or upgrade must have a minimum vintage to qualify for a business loan.
Most lenders require a minimum business vintage of 1-3 years and business experience of 1-5 years. If the business vintage is less, they might consider the total business experience. However, some banks also specify a specific business experience along with minimum business age. A longer business vintage demonstrates stability, reliability, and a proven ability to generate consistent revenue.
Annual Turnover and Profitability
The financial performance of a business is typically examined using annual turnover and net annual profit. The minimum annual turnover required may vary across lenders but is around INR 10-40 lakhs. The firm must have reported profits for at least 2 years to become eligible for a business loan. The minimum annual income of the business should be at least INR 1.5 lakhs. Profitability is equally crucial, as lenders seek assurance that the business has the ability to generate sufficient income to repay the loan.
Creditworthiness is a significant factor in determining business loan eligibility. Lenders evaluate the applicant’s credit score, which is a numerical representation of their credit history and repayment behaviour. A high credit score, typically above 700, increases the chances of loan approval. A good credit score signifies responsible financial behaviour and ensures lower interest rates and better loan terms.
The debt-to-income (DTI) ratio is an important consideration for lenders. It measures the proportion of an applicant’s monthly income that goes towards debt repayments. Most lenders prefer a DTI ratio below 50% to ensure that borrowers have enough income to meet their loan obligations comfortably.
Collateral and Financial Documents
Depending on the loan amount and type, lenders may require collateral as security against the loan. Commonly accepted collateral includes property, equipment, or other valuable assets. In addition, applicants must provide a range of financial documents, such as bank statements, audited financial statements, income tax returns, and business licenses, to support their loan application.
Existing Loans and Financial Obligations
Existing loan obligation is another factor considered while evaluating the applicant’s eligibility for a new business loan. Multiple outstanding loans or a high debt burden may affect the borrower’s ability to repay the additional loan, thus reducing the chances of approval. It is crucial to maintain a healthy credit profile and manage existing debt responsibly.
Tips to Improve Business Loan Eligibility
Improving your business loan eligibility requires taking proactive steps to strengthen your financial profile and demonstrate your creditworthiness to lenders. Here are some tips to enhance your chances of qualifying for a business loan:
- Achieve a good credit score: Make timely payments on existing loans to maintain a positive payment history. Minimise credit utilisation by keeping your credit card balances low. Avoid opening multiple new credit accounts in a short period, as it can negatively impact your credit score.
- Clear existing loans: Reduce your existing debt burden by repaying outstanding loans and credit card dues. Lowering your debt-to-income (DTI) ratio demonstrates your ability to manage debt responsibly and improves your eligibility for additional credit.
- Improve cash flow: Lenders assess your business’s ability to generate income and repay the loan. Focus on increasing your business’s cash flow by implementing strategies such as improving sales, reducing expenses, optimising pricing, and enhancing operational efficiency. A healthy cash flow enhances your loan eligibility.
- Increase business vintage: If your business is relatively new, consider waiting until you have a few years of operations under your belt before applying for a loan. Building a strong business history demonstrates stability and increases your eligibility for loans.
- Offer collateral or security: Valuable assets such as property, equipment, or inventory can be used as collateral, giving lenders assurance as it reduces risk. Offering collateral can boost your eligibility and lead to more favourable loan terms, higher approval chances, and low-interest rates.
- Build relationships with lenders: Develop relationships with potential lenders before applying for a loan. Regularly engage with your bank or financial institution, discuss your business plans, and seek advice. A good relationship with a lender can increase your chances of loan approval, as they will have more confidence in your business and its potential.
- Enhance financial documentation: Ensure your financial documentation is accurate, up-to-date, and complete. Maintain organised and audited financial statements, bank statements, income tax returns, and other relevant documents. This helps establish the financial health and credibility of your business.
Improving business loan eligibility is a continuous process. It requires consistent financial discipline, responsible credit management, and a focus on building a strong business track record. By implementing these strategies, you might enhance your chances of qualifying for a business loan and securing the necessary funds to support your business growth and expansion.
Business loans provide the necessary financial support for entrepreneurs to realize their business goals in India. Meeting the eligibility criteria is a crucial step in securing a loan. While the specific criteria may vary among lenders, factors such as age, business vintage, turnover, profitability, credit score, and collateral play significant roles in determining eligibility. By understanding these criteria and maintaining a strong financial profile, entrepreneurs can enhance their chances of obtaining a business loan and fueling the growth of their ventures.