A business loan is a financial tool that helps the business entrepreneur to meet a financial crisis. You can also grow your production, business, and assets by taking this loan. Private sector enterprises, sole-proprietorship organisations, partnership businesses, and self-employed individuals can opt for a business loan anytime. However, you must consider the four vital factors that affect your business loan eligibility.
Essential Factors Affecting Business Loan Eligibility
Following are the four key factors you need to focus on that directly affect the eligibility of your business loan:
- Credit history
The foremost thing that lenders check to determine your business loan eligibility is the credit history. It enables the lenders to verify whether you are eligible for getting the loan or not. Moreover, lenders get an idea about your borrowing pattern via CIBIL score or credit history.
When you take a loan and repay the entire amount within the specified time, your CIBIL score will get better. Any sort of delay during repayment will reduce the score. Hence, in order to become eligible for the business loan, you must maintain a healthy credit score.
- Business performance
Another factor that affects business loan eligibility is business performance. Lenders offer credit to successful business entities since they can expect timely repayment of the money. In addition, the business performance is estimated via your bank statement, balance sheet, and tax returns. If there is any discrepancy in the balance sheet, your chances of getting the loan approval will reduce.
- Collateral
Although business loans are collateral-free, several lenders will ask for security to diminish the risk caused while issuing business loans. If you provide collateral while opting for the loan, it will enhance your business loan eligibility by a good margin. Moreover, when offering collateral, your loan will get secured. Usually, business organisations provide cash savings or deposits, vehicles, inventory, and so on as security. In this way, if you fail to make the repayment, your lender will get the scope to recover the credit amount by selling your property.
- Age of business
Your business’s age is another vital factor that affects your business loan eligibility. In general, a business entity running for not more than two years is likely to get a loan rejection. However, the companies that are running for quite a few years can be eligible for a business loan. This is because they will have updated documents like bank statements, balance sheets, ITRs, etc., which will determine their financial stability.
Types of Business Loans
These days, there are several tailor made business loan options available, including relatively niche products like business loan for women. Let us discuss the types of business loan that you can avail:
- Term loan
Term loans are considered to be one of the most popular business loans. They are available in two types which are the short-term loans and long-term loans. The repayment tenure of a short-term loan ranges between 1 and 5 years. While for a long-term loan, the tenure is between 10 and 20 years.
- Working capital loan
These loans are short-term, having repayment tenure of 1 year. It helps businesses meet their regular needs, like purchasing raw materials, inventory, hiring workers, etc. In addition, the borrower does not need to keep any collateral with the financial institution while taking the loan. As a result, the interest rate is comparatively higher than general business loans.
- Letter of credit
A letter of credit is a credit limit provided to business enterprises by the lender or financial institution for international trade. Business owners commonly use the Letter of Credit during export and import of goods. Further, in case of foreign trade, business organisations require the guarantee of payment before signing the trade agreement with the foreign party. Under such circumstances, a letter of credit is applied.
- Start-up loan
These loans are offered to newly established businesses. Sometimes, due to unavoidable circumstances, borrowers fail to retain a proper credit history. Under such a situation, the lender provides a start-up loan to them. This loan is offered on the basis of the present turnover and growth potential of the company.
Documents Required for a Business Loan
Following are the list of the documents required for a business loan:
- Photo ID proof
- Address proof
- Income proof
- Bank statements
- Age proof
- Business proof documents
A business loan is an important financial instrument that helps a business to enhance productivity and expand. However, you must follow the above factors affecting business loan eligibility before availing the credit.
