Every business owner needs funds to grow the business at some point in time. One of the options to arrange funds for the business is to apply for a business loan secured/unsecured with a lender/financial institution. The requirement for funds can be to meet the working capital needs, to buy equipment or machinery, to expand the business office space, hire additional staff, etc.
Every lender or financial institution will have eligibility criteria that the business owner has to fulfill in order to get the loan. Different lenders have different criteria and the owner should first go through the criteria of every lender and then choose the lender whose eligibility criteria you can fulfill in order to avoid rejection. Avoiding rejection will also be good for your CIBIL score.
The basic eligibility criteria of any lender include business turnover, age of the applicant, the activity of the business, and credit score along with the required documentation. Few other criteria are loan amount, loan purpose, business plan, type of industry, entity type (LLP, proprietorship, etc.), licenses and permits for business, employer identification number, proof of collateral, annual business revenue and profit, bank statements, balance sheet, personal and business tax returns, and legal contracts and agreements.
Eligibility criteria in detail:
1. Turnover of the business
Turnover refers to how quickly a business can collect cash in accounting terms.
For a business to be eligible for a loan, the turnover of the business should be between Rs. 15 lakhs-Rs. 1 crore.
2. Age of the applicant
The applicant cannot be younger than 21 years at the time of loan application and should not be more than 65 years at the time of loan maturity.
3. The activity of the business
Number of years a business has been active is also a criterion to be eligible for a business loan. This also depends on the lender/institution. Most of the lenders consider a minimum of 3 years of activity to be suitable for granting a loan, but a few also give loans to businesses that are just a year old.
4. Credit score and credit history
Lenders/institutions check the credit score of the applicant before granting a loan. Most of them refer to source CIBIL while some also have their own credit evaluation methodology.
A credit score is a three-digit number which ranges from 300 to 850. Usually, the credit score should be between 750-900 to be eligible for a loan, but different lenders have different criteria. A good credit score increases your chances of getting a loan at affordable interest rates.
90% of the loans mostly are granted with a CIBIL score of more than 750. Higher the CIBIL score, higher the chances of loan approval.
Here is how the CIBIl scores have been divided:
1. CIBIL score below 600
CIBIL score of less than 600 has very fewer chances of getting approved. Immediate action to improve the score is required on part of the business owner.
2. CIBIL score between 600-649
For this CIBIL score range, the loan interest rates will be higher than usual.
3. CIBIL score between 650-699
CIBIL score in this range is fair decent but the options available would be very minimal.
4. CIBIL score between 700-749
CIBIL score between this range is considered good. The loan will be available at affordable and good interest rates.
5. CIBIL score of 750 and above
If you have a CIBIL score of 750 or more, the loan will be available at the lowest interest rate and the loan approval process will be much quicker than with less CIBIL score.
Loan eligibility is also determined using the current EMIs.
Along with the eligibility criteria mentioned above, documentation of the business should also be in place including the proof of identity, address proof, and other financial documents.
Some benefits of having a good credit score:
- A good CIBIL score would create a good impression regarding the creditworthiness of the borrower. Your repayment capability will only be checked with a good credit score, but if your CIBIl is not good, your loan request might immediately get rejected.
- If your CIBIL score is good, you can negotiate on certain terms and conditions with the lender. Prepayment charges, processing fee can also be nullified in some cases.
- People with a good credit score also get easy approval for loans for rented or leased properties like homes, commercial complexes, apartments, and offices.
- People with good credit scores can get exciting credit card offers from most banks. These include cards having higher limits, more privileges, and amazing offers with cashback.
If you apply for a loan from an NBFC, there are a few other criteria you should fulfill.
Here are some eligibility criteria if you apply for a loan from an NBFC:
- The business should be in operation since at least 2-3 years.
- Turnover of the shiness should be a minimum of Rs. 10 lakh during the last year.
- Income tax returns of the previous year should be more than Rs. 2.5 lakhs.
- Residence of the owner should not be the place of business operations.
- The small business owner should be the owner of either the business premises or a house.
If you want an unsecured loan for your business at attractive interest rates, contact Gromor Finance!