Business loan eligibility criteria in India: For start-ups & MSMEs

Most enterprises apply for a business loan to expand their business, purchase equipment or raw materials, lease or rent property, pay salaries, or simply to meet daily working capital needs. And while private banks and non-banking financial companies (NBFCs), and the government offer MSME loans (secured and unsecured), there are specific business loan eligibility criteria that one has to meet to avail funding options.

Fulfilling the loan qualification is a key problem faced by most businesses, large and small. While large businesses often have simultaneous business loan EMIs (which makes it risky for banks to offer more loan funds), for MSMEs, the loan rejection reason is usually lack of collateral, the business’s financial health and the borrower’s credit score.

This makes unsecured business loans or zero collateral loans, the most preferred option for MSMEs. The eligibility criteria for unsecured business loans is less stringent, and the loans are processed faster. The loan amount sanctioned is however limited.

In brief, there are host of short term business loans and MSME loans available in the market today, each with their own loan eligibility and documentation requirements (e.g., GST certificate, Udyam registration, etc.)

Criteria for business loan eligibility

Business loan eligibility in different banks varies according to their respective policies. While some have relaxed rules, others have stricter policies in place to prevent loan defaults. There are some basic business loan eligibility criteria followed by all institutions for providing business loans. These basic criteria must be fulfilled to have a maximum success rate for approval of loan applications.

While these are the basic requirements, depending on the finance institution the loan applicant will have to fulfill other requirements mentioned by the respective institution. The basic loan requirements might also differ between banks and NBFCs. It is recommended therefore to consult with different banks and NBFCs on their loan eligibility qualifications before finalising.

For example, some institutions will only accept business loan applications if you are 22 years instead of 18. Similarly, some lenders are more strict about credit score and accept loan applications from borrowers with CIBIL score of 750+.

Who can apply for business loans?

There are multiple types of businesses that apply for loans. Business loans in India are usually given to these entities:

• Manufacturers
• Traders
• Retailers
• Sole proprietorship firms, and partnership companies
• SMEs and MSMEs
• Self-employed individuals/professionals
• Corporates and Limited Liability Partnerships

Documents required to apply for a business loan

Documents that are required to be submitted along with the application of the business loan vary according to criteria set by different financial institutions. Documents depend on the type of business loan you are applying for. For instance, the eligibility requirements for a working capital loan is different from a business cash flow loan or GST business loan.

It also depends on whether your application is for a secured or unsecured business loan. Here are a few business loan eligibility documents that are commonly asked for when applying for loan:

The business loan eligibility criteria and documents required changes from time to time. It is advised to consult with the bank/NBFC for the latest qualification requirements.

Determining business loan eligibility

Once you apply for a business loan, the bank will evaluate your application based on certain factors. How your company scores on these factors will decide your eligibility. These are a few factors that a bank will analyse before giving you a business loan:

• Credit score: The bank will check the credit score of the borrower to determine his/her repayment capability. They will also dive into a firm’s outstanding loan and repayment history and liabilities. A good credit history is important to get your loan application sanctioned.
• Business profitability: Banks will study the balance sheet and profit and loss accounts of businesses to determine the profits the business has been making. The revenue that the business is making will help the bank analyse its repayment capacity.
• Business stability: Business loans are given to businesses that are at least 2 years old. The age of the business (i.e., business vintage) helps determine the stability of the company. Older companies tend to get loans approved faster as they already have a proven track record in the market.
• Collateral: If a business chooses a secured business loan, then banks evaluate collateral that is pledged by the borrower. A secured business loan helps your loan get approved faster and at a lower interest rate as you are supporting the loan with a high-value asset.

There are also small and long-term business loans, MSME loans and startup loans offered by banks and the government. Small business loan eligibility will depend on the category of MSME classification the firm belongs to. MSME loan eligibility is determined by the same conditions as a normal business loan. However, the businesses should prove they are registered MSMEs by submitting Udyam registration certificate.

There are also startup business loans being offered by the Government of India and private banks. Both public and private sector entities offer startup loans through various special policies and schemes. The Stand-Up India scheme, CGTMSE scheme, etc., are schemes by the government to boost startup growth in the country. Startup loan eligibility is the same as that of normal business loan eligibility. The only difference is that the applicant should have a business plan.

Types of business loans

Business loan requirements in India vary with different banks and other credit organisations.  It also varies with different types of business loans. Here are the various types of business loans in India:

• Term loan – A short-term or a long-term business loan with repayment period between 12 months to 5 years for purposes of business expansion, technology upgrade, etc.
• Working capital loan – Short-term loans with a repayment tenure of 12 months to meet daily business requirements.
• Invoice financing – Invoices for which a business has not received payments from the buyer will be financed by a bank at a discounted rate. This is to solve delayed payments from buyers.
• Letter of credit – A letter from a bank guaranteeing that payment from a buyer will be received on time. If the buyer is unable to make a payment, the bank will cover the full or remaining amount of the purchase.
• Overdraft facility – A facility where account holders can withdraw money up to a sanctioned limit from a bank account even if the balance is zero.
• Equipment finance – Mostly availed by manufacturing enterprises to purchase new machinery or upgrade technology.
• Government business loans – Business loans introduced by the government under various schemes to provide loans with low interest rates and flexible payment period.

To apply for any of these business loans, companies will have to meet eligibility criteria and provide business loan eligibility documents.  Your loan application approval will depend on fulfilling the eligibility criteria and providing accurate documents. Your credit profile as a business is also important when it comes to loan sanctions.

How to improve your chances of getting a business loan?

To get easy access to a business loan, the primary determinant is the credit profile of the business along with its performance. Here are few ways that can improve your chances of accessing a business loan:

• Have a healthy credit profile without loan defaults
• Submit correct documents
• Fill in the application form accurately
• Learn about government schemes that gives easy access to finance

Alternatively, you can also check Business Loans on Tata nexarc to find collateral-free business loans up to ₹30 lakh offered by leading banks and financial institutions in India. The process is online, requires minimum documentation, and a loan offer can be made within 5 minutes.

Note: The content of this article has been updated on 04 April, 2023.