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Demystifying business loan eligibility criteria in India

Starting or expanding a business requires a significant amount of capital, and many small business owners in India turn to business loans to finance their ventures. However, getting a business loan in India can be challenging, as there are several eligibility criteria that lenders use to assess the risk of lending money. In this article, we will demystify the business loan eligibility criteria in India, including the process and steps involved.

Business loan eligibility criteria in India

  1. Age limit

The minimum and maximum age to apply for a business loan in India varies from lender to lender. However, generally,  the minimum age to apply the same is 21 years, and the maximum age limit is 65 years. In addition, lenders prefer to lend to younger borrowers as they have a longer repayment period. 

  1. Business vintage

The vintage of the business is an important criterion for lenders. Most lenders require the business to be operational for at least two to three years. This is to ensure that the business has a stable track record and is generating sufficient revenue to repay the loan. 

  1. Annual turnover

The annual turnover of the business is another important criterion for lenders. Lenders prefer to lend to businesses with a high turnover as it indicates a stable and profitable business. The minimum turnover required by lenders varies from lender to lender, but it is generally around Rs. 20-30 lakhs per annum.

  1. Credit score

A good credit score is essential to get a business loan in India. The credit score reflects the borrower’s creditworthiness and is based on their credit history, repayment behavior, and credit utilisation ratio. Further, most lenders require a minimum credit score of 650 to approve a business loan application.

  1. Financial documents

Lenders require financial documents such as audited financial statements, bank statements, and tax returns to assess the borrower’s financial stability and repayment capacity. These documents help lenders evaluate the business’s revenue, profit, and expenses to determine whether the business can repay the loan.

  1. Collateral

It is a security pledged by the borrower to secure the loan. Lenders prefer borrowers who can offer collateral as it reduces the risk of default. The type of collateral required varies from lender to lender, but it can include property, inventory, or equipment.

Process to apply for a business loan in India

  • Research lenders

The first step to getting a business loan in India is to research lenders. There are several types of lenders in India, including banks, NBFCs, and fintech lenders. Each lender has different eligibility criteria, interest rates, and repayment terms, so it’s essential to research and compare lenders to find the best option for your business.

  • Check eligibility

Once you have shortlisted the lenders, the next step is to check your eligibility for the business loan. You can check the lender’s website or contact them to find out the eligibility criteria, loan amount, and repayment terms.

  • Prepare documents

After checking your eligibility, you need to prepare the required documents. This can include financial statements, tax returns, bank statements, business registration documents, and collateral documents. It’s essential to ensure that the documents are accurate, complete, and updated to avoid any delays or rejection of the loan application.

  • Apply for the loan

Once you have prepared the documents, you can apply for the loan. You can apply online or visit the lender’s branch to submit the application. The lender will verify your documents and evaluate your eligibility based on their criteria. If your application is approved, the lender will disburse the loan amount to your bank account.

Steps to improve business loan eligibility

  • Improve credit score

A good credit score is essential to get a business loan in India. Usually, a minimum score of 650 or above is considered good to obtain a business loan. To improve your credit score, you need to maintain a good credit history, pay your bills on time, and reduce your credit utilisation ratio.

  • Increase business turnover

It can improve your eligibility for a business loan. You can achieve this by increasing your sales, expanding your customer base, and diversifying your product or service offerings.

  • Reduce expenses

It  can improve your profitability and repayment capacity, which can increase your eligibility for a business loan. You can achieve this by negotiating with suppliers, reducing overhead costs, and optimizing your inventory management.

  • Maintain accurate financial records

It is crucial to assess your business’s financial stability and repayment capacity. It also helps lenders evaluate your loan application faster and make an informed decision.

  • Provide collateral

Providing collateral can increase your eligibility for a business loan as it reduces the lender’s risk of default. You can offer collateral such as property, inventory, or equipment to secure the loan.

Closing thoughts 

Getting a business loan in India can be challenging due to the strict eligibility criteria of different lenders. However, by understanding the criteria, preparing the required documents, and improving your eligibility, you can increase your chances of getting approved for a loan. It’s important to research and compare lenders, maintain accurate financial records, and provide collateral to secure the loan. With the right preparation and support, you can access the funding you need to start or expand your business in India.

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