Securing a business loan can be the catalyst for a company’s growth, whether it’s for expanding operations, purchasing new equipment, or managing working capital. To get a business loan, it’s essential to understand the eligibility criteria and prepare the necessary documentation. This guide delves into the key factors that lenders in India, including banks and Non-Banking Financial Companies (NBFCs), evaluate to determine your eligibility for business loan.
Key Eligibility Criteria for a Business Loan
While specific requirements can vary between lenders, there are a few fundamental factors that are universally assessed. These criteria provide a holistic view of your business’s financial health and its ability to repay the borrowed amount.
CIBIL Score and Financial History
Your credit score is a numerical representation of your creditworthiness and is one of the most critical factors. A CIBIL score of 750 or higher is generally considered excellent and significantly improves your chances of loan approval. It demonstrates a history of responsible credit management and timely debt repayment. Lenders also review your business’s and your personal financial statements, including past Income Tax Returns (ITR) and bank statements, to assess income stability, cash flow, and existing debt obligations.
Business Vintage and Profile
Lenders prefer to fund businesses with a proven track record. Most financial institutions require a minimum business vintage of at least three years. This ensures the business is stable and has the capacity to withstand market fluctuations. The type of business—whether it’s a sole proprietorship, partnership firm, private limited company, or a public limited company—also plays a crucial role in the eligibility assessment. Businesses in the manufacturing sector may be viewed as less risky compared to service-based businesses because they possess tangible assets that can be used as collateral.
Age and Turnover
Applicants must meet specific age criteria, typically ranging from 24 to 80 years at the time of loan maturity. The business’s annual turnover is another key metric. While the exact figure varies by lender and loan amount, a minimum yearly turnover of at least ₹10 lakhs is a common requirement. Some lenders may even have higher standards, with certain banks expecting a turnover of ₹25 lakhs or more for a business to qualify.
Profitability
A business must demonstrate profitability for at least the last two years to be considered for an unsecured loan. This shows that the industry generates sufficient revenue to cover its operational expenses and loan repayments.
Documents Required for a Business Loan Application
Having all the necessary paperwork ready can streamline the application process and increase your chances of quick approval. The following is a comprehensive list of documents typically required.
KYC and Business-Related Documents
- Identity Proof: PAN card, Aadhaar card, Voter’s ID, or Passport.
- Address Proof: Aadhaar card, Voter’s ID, or Passport.
- Business Proof: GST registration certificate, MSME/Udyam registration, or a business license.
- Proof of Business Ownership: Documents establishing legal ownership, like a Certificate of Incorporation or a partnership deed.
Financial Documents
- Bank Statements: Business bank account statements for the last 6 to 12 months.
- Financial Statements: Audited Profit and Loss (P&L) statements and Balance Sheets for the last 2 to 3 years, certified by a Chartered Accountant (CA).
- Income Tax Returns (ITR): Both business and personal ITRs for the last 2 to 3 years.
Business Loan Options for Specific Situations
While the general eligibility criteria apply, there are specific financing options available for businesses that may not meet all the standard requirements.
Getting a Business Loan with a Low CIBIL Score
A low CIBIL score can make it challenging to secure an unsecured loan from a traditional bank. However, there are alternative avenues to explore.
- Secured Loans: Offering collateral such as property, machinery, or inventory can significantly improve your chances. Since the risk for the lender is reduced, they are more willing to approve the loan, even with a lower credit score.
- NBFCs and Small Finance Banks (SFBs): These institutions often have more flexible eligibility criteria compared to large commercial banks. They may be more focused on your business’s cash flow and future repayment capacity than on a strict CIBIL score threshold.
- Overdraft Facility: If you have a good relationship with your bank, you may be able to secure an overdraft facility, which is a type of loan where interest is charged only on the amount utilized. Banks may not be as strict with CIBIL scores for this facility.
Government Schemes for Startups and MSMEs
The Indian government has launched several schemes to provide financial support to small businesses and startups with favorable terms.
- Pradhan Mantri Mudra Yojana (PMMY): Offers collateral-free loans up to ₹10 lakh to non-corporate, non-farm small and micro-enterprises under three categories: Shishu (up to ₹50,000), Kishore (₹50,001 to ₹5 lakh), and Tarun (₹5 lakh to ₹10 lakh).
- Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE): This scheme provides collateral-free loans up to ₹2 crore for eligible MSMEs. The government acts as a guarantor for a part of the loan, reducing the risk for the lender.
- Stand-Up India Scheme: This scheme promotes entrepreneurship among women and Scheduled Caste/Scheduled Tribe (SC/ST) communities by providing loans between ₹10 lakh and ₹1 crore to establish greenfield enterprises.
Understanding Interest Rates and Other Charges
The interest rate on a business loan is determined by various factors, including your credit score, business profile, and the nature of the loan (secured or unsecured). Interest rates from banks in India can start from around 10.50% per annum, while NBFCs might have higher rates, sometimes exceeding 30%. In addition to interest, be prepared for other charges such as processing fees (up to 5% of the loan amount), part-prepayment or foreclosure charges, and penal interest on delayed payments. Always compare offerings from multiple lenders to find the most favorable terms for your business.
