A HANDY READY RECKONER ON WHAT LENDING INSTITUTIONS LOOK FOR TO DECIDE LOAN ELIGIBILITY FOR SMEs

Raising funds to start a new business or expand an existing one, is a prime requirement. If you are a start-up or looking to expand your existing business there are numerous options for you to raise the capital. There are different types of loans that can be availed from the banks for the aforementioned purpose. These loans are usually availed in the form of a secured or an unsecured loan. Loans that require an individual or a business to provide security for repayment are called as secured loans. However, businesses or individuals who wish to procure loans without providing security can avail an unsecured loan as these are collateral-free loan. Ideally banks grant an unsecured loan to its existing customers and hence require minimal documentation and the process is hassle-free.

An unsecured business loan is an efficient alternative for individuals or businesses that do not possess many assets or do not wish to put up collateral in order to secure a loan. These loans are pre-approved loans in the form of working capital loan, SME loan, personal loan for business, loan for retailers and can be availed for a specific quantum of time.

Given below are some of the operations for which the company or individual can procure a working capital loan.

  • Purchasing raw materials
  • Managing day-to-day inventory
  • Payment for utility costs like rent, electricity bills, employees’ salary
  • Finance payment that may be blocked by debtors
  • Payment towards material suppliers in advance
  • Maintaining adequate level of cash flow

When is a working capital loan needed?

Occasionally small businesses fall short of finances and do not possess adequate assets to meet some of their routine business expenses, on account of various reasons. Such businesses can opt for an SME loan that is specifically designed to cater to small-to-medium business enterprises. Few businesses have an unpredictable income or in the case of manufacturing companies, may be dependent on the seasonal sale of the retailer. They may undergo production but the sale of their goods by retailers is seasonal. These companies stand in need of finances to make sure that their daily operations go smoothly and can choose to apply for a loan for retailers. Companies with a good credit rating can usually apply for these loans without security i.e. Collateral free loan.

Advantages of a Business Loan:

· Faster application process.

When it comes to an unsecured business loan, the application process is faster as the bank does not need to evaluate your collateral and determine its value. Instead, the bank can focus on your business credit report, monthly sales etc., which makes the process relatively faster than the process for other loans. Majority of banks offer fastest business loan. The loan seeker must consider all the financial aspects and bank policies before applying for a loan.

· No collateral required.

A lot of small businesses of start-ups do not possess collateral against which they can avail a loan and hence are ineligible for a secured loan. For these businesses and individuals, an unsecured loan in the form of loan for small business is a pertinent solution as the banks do not require collateral to grant the loan. The bank will however assess numerous factors like business credit report, monthly sales, business plans, etc. To determine the eligibility for an unsecured loan.

If you wish to avail a business loan given below are some of the eligibility criteria that you must fulfill

Eligibility criteria for a Business Loan

· Good credit score

The most critical criterion for a loan-seeker to be eligible for a business loan is to possess an adequate credit score. In the cases pertaining to business loans, the bank usually approaches the customer with various offers after assessing their credit score and deeming them eligible for the said loan. Since an individual or an entity is not required to put up collateral to avail these loans, it is vital that they offer some sort of assurance towards the repayment of loan. A good credit score is a significant factor that the bank can consider in order to avail a business loan. It goes without saying that no bank or financial institution will grant an unsecured loan to a business with bad credit score.

· Sufficient bank balance.

Ideally banks choose to offer business loans to their existing customers but given certain factors a bank may grant a business loan to a non-customer. This is where your bank balance is an important factor that the bank can consider towards the application of your loan. The bank will usually require a last 6 months’ bank statement which it will review to determine the eligibility for the requested loan. Hence, it is important to maintain an adequate bank balance before applying for a business loan.

· Income stability.

Another important financial criterion towards availing a business loan is stability of income. In case of a salaried employee, the bank will request recent salary slips to assess the eligibility of the individual towards the loan. For business/business persons seeking an unsecured loan the bank will request last three year’s Income Tax returns along with business profile, balance sheet and Profit and Loss statement to review and determine the eligibility. Needless to say, individuals with a stable financial income and businesses with a constant flow of stable income are more likely to be eligible for the said loan.

· Good repayment record.

The bank will review your repayment records towards any previous loans availed, which will give them a clear history of your credit-worthiness and help them determine your eligibility for an unsecured loan. If you have a good repayment track record your chances to avail a loan increase significantly

· Excellent saving history.

The bank usually grants an unsecured loan against a specific slab of income and levies interest towards the repayment of the loan. Hence, if a business wishes to apply for an unsecured loan of a high amount, it is necessary for it to have a high income. Businesses with an excellent saving history have an opportunity to avail higher amounts of loan.

· Age

Unsecured loans are usually granted to individuals between the ages of 21 to 60 years.

Conclusion:

With the advent of modern technology, it has become easier to check your eligibility for a loan and start the application online. You can check your credit score online and check your eligibility for a loan via your net-banking account.

If you are eligible for a loan and provide all the necessary documentation you can even avail an online loan by processing your application online. You can also visit the bank in person and get all the necessary information regarding your application process. It is clear that the banks and lending institutions will only grant the loans to an individual or business with a good credit rating. It is however vital to check various bank policies, offers and assess your financial profile before applying for said loan.

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