Business Loan Eligibility Criteria

 For many entrepreneurs launching a traditional business in the sectors of service, manufacturing, or trading, a bank loan is an excellent alternative. Even though there has been a lot of buzz about angel or private equity investment in recent years, bank loans continue to fund the majority of enterprises in India. An entrepreneur can easily receive a business loan for a startup with the help of a solid banking system and a network of lending Non-Banking Financial Companies (NBFCs). We'll look at some of the most important business loan eligibility criteria in this article.



Scheme or Product Fit

Banks, unlike equity investors, have a robust structure and method for granting or rejecting bank loan sanctions depending on a variety of factors. As a result, before applying for a business loan, the Entrepreneur should familiarise himself with the various business loan schemes offered by the bank and apply for the appropriate one. For example, several banks provide the MUDRA Loan Scheme, which provides budding entrepreneurs with an unsecured business loan of less than Rs.10 lakh. A new Entrepreneur who applies under such a scheme is more likely to succeed than one who applies through a scheme where the Entrepreneur does not fulfil the bank's lending standards.

Documents

Bankers use a set of procedures when processing loan applications and need a specified collection of documents to complete a bank loan proposal. As a result, in order to be eligible for a bank loan, the Entrepreneur must assemble and submit excellent documents to the banker. The following are some of the documentation required for a business loan application to be processed:

  • Financial Projection
  • Financials presented in CMA Format – Credit Monitoring Arrangement Format
  • Business Loan Request Letter
  • Certificate of Incorporation (If Company / LLP)
  • Partnership Deed (In case of Partnership Firm)
  • PAN of the Promoters / Directors / Partners
  • Address Proof of the Promoters / Directors / Partners
  • MSME / Udyog Aadhaar Registration (if available)
  • VAT Registration / Service Tax Registration
  • Copies of IT Return of the Promoters (if available)
  • Bank Statement of the Promoters
  • Valuation of Collateral Property (if applicable)
  • Legal Opinion for Collateral Property (if applicable)
  • Assets & Liabilities Statement of Promoters (if applicable)
The above list is merely illustrative. Based on the credit profile of the bank loan application, the banker may seek more or less information at his or her discretion. Furthermore, submitting the required documents does not guarantee loan approval. The above documents must be supplied, and the banker's credit assessment will be based on a variety of variables.

Profit & Cash Flow

Bankers, unlike angel or equity investors, seek for profit and solid cash flow when deciding whether or not to lend. Bankers do not own any stock in the company and are only entitled to interest on the monies they have borrowed. As a result, bankers would disregard the business's long-term profitability and positive cash flow, which is expected to be created in the future. After the first setup time, bankers are more likely to support proposals that are profitable and have positive cash flow. As a result, as a borrower, you must demonstrate that your firm is performing well and that your operations are not just profitable but also generate enough cash to pay all of your financial obligations.

Promoters Contribution or Margin

The promoter must have and invest the Promoters Contribution or Margin in order to obtain any loan. Banks do not lend 100% of the amounts required for equipment or working capital investments. As a result, the promoter must have sufficient funds to meet the loan terms' margin requirements. For example, if an entrepreneur wishes to buy machinery for Rs.10 lakhs, the bank will grant an equipment loan with a 20% margin (assumed number). In this example, the bank would lend Rs. 8 lakhs and the promoter would have to invest Rs. 2 lakhs of his or her own money to buy the machinery.Margin requirements might range from 50 percent to ten percent, depending on the type of the loan and the Entrepreneur's needs.

Primary Security

Most bank-supplied business lending programmes necessitate the creation of a primary security using funds provided by the banks. If a business loan is taken out to buy machinery, the machinery is referred to as primary security. If a business loan is taken out for working capital (i.e., raw materials or stocks), the raw materials, stocks, or receivables will be the principal security. In the event of a loan default, the Banker would be able to hypothecate and sell the primary securities to recoup losses.

Banks prefer projects that result in the creation of strong primary collateral that can be easily hypothecated and sold by the bank. Large machinery, for example, would be deemed a strong primary security, whereas interior decorations may be considered a weak primary security — because they are difficult to take and sell.

Collateral Security

In addition to primary security, which is hypothecated by the bank by default, bankers frequently ask borrowers for collateral security. Bankers prefer collateral security that is in the form of residential or commercial property. Banks cannot accept agricultural property as collateral security because agricultural property is auctioned off under the SARFESI Act. There are a variety of unsecured business loan options available; however, securing a bank loan with strong collateral will greatly boost your chances.

Promoters Experience

Banks give weight to the promoters' age, education, experience, skill, and background in addition to the foregoing factors. While there are no hard and fast regulations, bankers generally prefer entrepreneurs with extensive experience and knowledge of the business for which a loan is sought.

Promoters Reputation

While sanctioning a bank loan, bankers look for a spotless track record of loan payback. Prior to authorising any loan facilities, the banker will review up to one year's worth of bank statements as well as the CIBIL score. The chances of securing a bank loan can be seriously harmed if there is a cheque bounce, a low CIBIL score, or repayment defaults. As a result, loan applicants should check their CIBIL score on a regular basis, especially if they are ready to apply for a bank loan.

Conclusion

At any point in the loan lifecycle, we can operate in both established and new markets. We can handle both basic and complex large syndicate deals. You can call our helpline number +91-9477079053 to learn about the greatest prices and offers. They will assist you in every way they can. If you have any further questions, please contact me at Best Business Loan in India. 

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