Eligibility Criteria for Business Loans

In India, the businesses securing a loan is often important to fuel growth, manage working capital or even invest in new assets. However, not all businesses qualify for a loan automatically. The lenders look into many factors before giving their nod for a business loan. Having an understanding of the eligibility criteria and Business loans requirements beforehand helps increase the chances of approval and makes sure there is a smoother access to financing. 

With the help of this blog, you will be able to explore the key eligibility factors, documentation requirements and also the specific criteria for MSME loans and other business financing options in India. 

1. Business Structure and Type

The lenders first evaluate the legal structure of the business, which affects the eligibility and the loan terms. The common structures include: 

• Proprietorship: It is the most basic structure for a simple set-up, and it gets easier for the borrowers to get small working capital loans.
   
• Partnership: When in a partnership, the lenders will require a partnership deed, and that may also act as a moderate eligibility criterion.
  
• Private Limited or Limited Liability Partnership (LLP): This is mostly preferred by the banks for a large loan due to transparency and compliance.
  
• MSME Registration: Micro, Medium and small enterprises with proper registration generally qualify for government-backed loans and subsidies. 

Key Point: A business that is registered with a clear legal structure normally has higher approval chances than an unregistered venture. 

2. Minimum Business Vintage

The banks and the NBFCs also prefer businesses that have been operational for a minimal period. This also helps in assessing the business stability and repayment capacity. 

• Small businesses/startups: Normally, one to three years of establishment. 
• Established SMEs: more than three to five years. 
• MSME Loans: The loans that are backed up by the government may still consider businesses with even 6 months of operational history if the other criteria are strong. 

Key Point: The more years of running the business, it indicates financial stability with a proven track record. 

3. Annual Turnover

A business’s yearly revenue is the key indicator for the lenders. Higher turnover usually signals the ability to repay the loan. 

• The small business loans require a minimum turnover of INR 10 to 50 lakhs per annum. 
• The medium and the large loans may also require INR 50 lakhs or more in yearly revenue. 
• The MSME loan schemes run by the government also have a minimum turnover limit based on the type of enterprise. 

Key Point: It is important for businesses to maintain the proper accounting records to prove their annual revenue. 

4. Credit Score and Financial Health

The borrowers should have a strong credit history, as the lenders always check the credit scores of the business and the owner. 

• The recommended credit score for businesses is 750+ for a smooth approval. 
•  The eligibility can be reduced if there is any default history or negative records against your name. 
• If you are choosing any bank as your financier, they also check and evaluate your debt-to-income ratio and all the existing liabilities.

Key Point: Keeping a record of timely payments of loans taken earlier, the taxes paid on time and the bills paid timely also have a huge impact on business loan eligibility. 

5. Collateral or Security Requirement

Some loans remain unsecured throughout their tenure, while some loans require collateral or security. 

• Secured Loans: The secured loans, like the long-term loans or machinery loans that will always need an asset attached to them
  
• Unsecured Loans:  The unsecured loans are the ones which do not require collateral or a property attached to their loans. 

Key Point: It is important for businesses to have an assessment of their assets before they apply for a secured or unsecured loan. 

6. Profitability and Cash Flow

The businesses with continuous profit growth and positive cash flow are most likely preferred by the lenders. This makes sure that the businesses can meet the EMIs monthly without any financial stress.

• When the borrowers go to a bank for money, the bank takes into consideration their financial statements, like balance sheets, cash flow statements.                                                                                                                                                                                                                                                                                                                 
  
• If the business is a startup, or a well-planned revenue or a well-prepared business plan, it can strengthen the eligibility. 

Key Point: Having a good, healthy cash flow showing profitability is important for securing larger loans. 

7. Documentation Requirements

Having proper documentation is very important for businesses to get loan approval. Some of the commonly required documents include: 

• Business registration certificate
• PAN card of the business and owners
• GST registration certificate (if applicable)
• Bank statements for the last 6–12 months
• Audited financial statements or income tax returns
• Proof of business address and identity of owners

Key Point: Complete and accurate documentation gives a boost to the fast processing and approval chances of the loan. 

8. MSME Loan Specific Criteria

The eligibility criteria for an MSME loan are slightly more workable, but it still needs to be in adherence to the government rules: 

• The businesses should be recognised as Micro, Small, or Medium as per government norms. 
• They should be registered under Udyog Aadhaar / Udyam Registration. 
• There should be a proper business plan and usage of the loan for business purposes. 
• Adherence to tax filings and statutory obligations. 

Key Point: The MSME loans are often offered at lower interest rates, and they offer collateral-free options for the eligible businesses. 

9. Other Considerations

• Purpose of Loan: The banks might also inquire about your purpose for taking a loan, likely for working capital, expansion or equipment purchase.
  
• Repayment Capacity: The repayment capacity should not always exceed 30-40% of the net monthly revenue.
  
• Business Sector:  There are some sectors that may have a higher risk assessment, which can affect their eligibility. 

Key Point: Having alignment of the loan type with the business purpose and financial stability often increases the approval chances. 

Comparison between the eligibility criteria of different business loans

Explanation:

• Business Vintage:  The tenure of the business. 
• Turnover: The money made by the business in a fiscal year.
• Collateral: The assets that can be attached for a secured loan. 
• Credit Score: The credit score or the financial credibility of the business owner.
• Purpose: The purpose of applying for a loan. 

Conclusion

Having the basic knowledge about the business loan eligibility is the very first baby step towards securing the right funding. The banks and the NBFCs always have multiple factors that assess many factors, which include business tenure, turnover, credit history, profitability, collateral and documentation. For MSMEs, the government-backed loan schemes are an additional support for making finance more accessible for smaller businesses.