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For any business owner, getting a business loan may seem like a hassle. One needs to approach multiple lenders, submit documents, seek approval, manage collateral, and so on. However, there is also a less hassled way of obtaining a business loan. Do you know that lenders offer pre-approved business loans?
Pre-approved business loans have many advantages over other business loans. This article will explain what a pre-approved business loan is, its eligibility, advantages and required documents.
What is a pre-approved business loan?
A pre-approved business loan is a loan that is approved before the borrower fills in the application form and applies for the loan.
The lenders usually approve a certain amount of loan on the basis of the sound financial background of the borrower. If business owners wish to seek a loan, they can fill in the form and submit the documents.
How does a lender verify financial background before document submission? A pre-approved business loan is usually offered to existing customers. Meaning the borrower and lender has some established financial relationship. It can be in form of a business account, credit card, or any other financial service that the borrower may have availed. On the basis of these financial transactions, the bank or NBFC determines the credibility of the borrower for offering a pre-approved loan.
For the eligibility of a pre-approved loan, what matters is the borrower’s financial relationship with the lender. A credit score does not matter here as the bank/NBFC will determine creditworthiness on the basis of the financial relationship of the borrower with them. It can be in form of a bank account, credit card, or any loan obtained and repaid previously.
Some of the other eligibility criteria include:
- The borrower should be in the age group of 25-65
- The business should be in operation for at least two years
- The borrower should have filed Income Tax returns (ITR) for the at least past one year
- The business should not fall under any restricted category (or is blacklisted)
Note: Eligibility criteria for a pre-approved loan varies from lender to lender. For example, some lenders may have turnover as one of the eligibility criteria.
Features of a pre-approved loan
- Quick disbursal: Since the loan amount is already approved, the loan processing time is lesser. Therefore, it takes minimal time for the lender to disburse the loan.
- No collateral: The pre-approved loan usually does not require any collateral to be promised.
- Repayment: Pre-approved loans are usually short term loans and need to be repaid within the span of 12-60 months. It has to be repaid in equated monthly installments (EMI). If it is a loan on a credit card, you will need to pay EMI through the credit card bill.
- Paperless process: Nowadays, many banks have adopted a paperless process for the pre-approved loan. Borrowers can apply for a pre-approved loan online.
Benefits of a pre-approved loan
- The loan can be used for any business needs: Unlike many other types of loans which are meant for a specific purpose, pre-approved loans can be used for any kind of activity in the business. It can also be used as working capital.
- Better interest rate: Usually, pre-approved loans are offered at a better interest rate compared to other types of business loans.
- No fees : Since pre-approved loan is a promotional offer from the lender, they often do not charge any fees such as processing charges.
- Minimum documentation: Since the loan is pre-approved basis the financial records that the lender already has, the borrower does not need to submit an exhaustive list of documents for obtaining the loan. Also, the bank already has the borrower’s KYC documents and income proofs.
Documents required for a pre-approved business loan
As mentioned above, a pre-approved business loan does not require an exhaustive list of documents as some documents such as KYC, documents establishing financial background, etc., are already with the lender. However, the borrower still needs to submit a few documents to process the loan.
Some of the common documents that a lender may ask for include:
- KYC documents (In case the lender does not have it already)
- Bank statements for the last 6-12 months
- PAN card and Aadhaar card copies of business owners
- Proof of business registration
- GST registration
Note: The requirement of documents varies from lender to lender. It is recommended that you check the list of required documents from the lender at the time of obtaining the loan.
Frequently asked questions
Here is a list of frequently asked questions about pre-approved business loan.
How to obtain a pre-approved loan for a small business?
Can you get pre-approval for a business loan?
A lender is offering you a pre-approved loan. Should you get it?
Concluding remarks: Points to ponder about a pre-approved loan
- Just because you have a pre-approved loan offer, you do not have to take it if you have no requirement for it.
- Pre-approved loans are usually promotional offers, and are valid only for a few days. Hence, if you want to take the offer, you need to make a quick decision.
- Compare a pre-approved loan offer with other business loan offer that you may have in hand before making any decision.
- Check the business loan agreement thoroughly before signing it.