Business Loan Eligibility

Banks and NBFCs determine your business loan eligibility by evaluating various factors, such as your credit score, business vintage, annual turnover, profitability, and the type of industry you operate in. Here are the key eligibility criteria used by leading lenders, along with tips to enhance your chances of securing your loan approval.

How Banks & NBFCs Determine Business Loan Eligibility?

Banks and NBFCs use two main methods to check if you qualify for a business loan: the Multiplier Method and the DSCR/EMI-NMI Ratio.

1. Multiplier Method: They multiply your business’s monthly or yearly income by a set number (usually 6 to 24 months). For example, if you earn ₹5 lakh/month and the multiplier is 12, your loan eligibility could be ₹60 lakh.  

2. DSCR/EMI-NMI Ratio: They check if your income can cover loan repayments. A ratio of 1.25 to 1.5 or higher is preferred. For example, if your monthly income is ₹10 lakh and EMIs are ₹4 lakh, your ratio is 2.5, which is good

These methods ensure the loan amount suits your repayment ability, reducing financial stress and helping your business grow.

What is The Business Loan Eligibility?

To be eligible for the best business loan in India, lenders primarily evaluate your business's income and its ability to repay the loan. They also consider several factors such as your credit score, business revenue, age of the business, type of industry, business stability, and financial records.

Business Loan Interest Rate Comparison And Loan Amount Ranges Offered By Top Banks

Factors Affecting Business Loan Eligibility

Qualifying for a business loan can be an important step in growing your business. Understanding the factors that determine your eligibility can help you improve your chances of approval and secure better terms for your business loan.

1. Credit Score :
   • A credit score of 700 or above is ideal, as it demonstrates financial responsibility and reduces the risk of default.
   • Higher credit scores often result in lower interest rates on business loans.
   • Some lenders may offer loans to businesses with lower credit scores, but these typically come with higher interest rates.
   • Regularly monitor and work on improving your credit score. Utilizing tools like business credit cards can help build and maintain a strong credit history.
2. Business Vintage:
   • Lenders prefer businesses with a proven track record. Typically, a business should be operational for at least 2-3 years to be eligible for a loan.
   • Older businesses with a stable financial history are more likely to secure loans at favorable rates.
3. Annual Turnover:
   • Higher annual turnover increases the likelihood of loan approval.
   • Most lenders require a minimum annual turnover, which can vary depending on the size and type of the business. For small businesses, this could be around ₹10 lakh or more.
4. Profitability
   • Consistent profitability is a key factor. Lenders want to see that your business generates enough revenue to cover loan repayments.
   • Profit margins and net income are often scrutinized to assess the financial health of your business.
5. Business Plan and Projections:
   • A well-structured business plan with clear financial projections can significantly improve your chances of securing a loan.
   • Lenders want to see a viable plan for how the loan will be used and how it will contribute to the growth and profitability of the business.
6. Collateral:
   • Secured business loans require collateral, such as property, equipment, or inventory. The value of the collateral can affect the loan amount and interest rate.
   • Unsecured business loans do not require collateral but may come with higher interest rates and stricter eligibility criteria.
7. Debt-to-Income Ratio:
   • Lenders assess your business's debt-to-income ratio to ensure you can manage additional debt.
   • Ideally, your total debt obligations should not exceed 40-50% of your business income.
8. Industry Type:
   • Some industries are considered higher risk than others, which can affect loan eligibility and terms.
   • Businesses in stable and growing industries may find it easier to secure loans at favorable rates.
9. Repayment Capacity:
   • Your business's ability to repay the loan is a critical factor. Lenders will evaluate your cash flow and financial statements to assess repayment capacity.
   • Use tools like business loan EMI calculators to plan your repayments and ensure they align with your cash flow.
10. Documentation:
    • Proper documentation is essential for loan approval. This includes financial statements, tax returns, business licenses, and proof of ownership.
    • Ensure all documents are accurate and up-to-date to avoid delays in the loan approval process.

By keeping these factors in check and presenting a strong case for your business, you can enhance your chances of securing a business loan and driving your enterprise towards greater success.

Tips To Improve Business Loan Eligibility

Here are some quick ways to boost your chances of getting a business loan approved:

1. Maintain a Strong Credit Score (700+): Pay bills on time, avoid multiple loan applications, and manage credit wisely to build a strong score.

2. Show Consistent Revenue: Provide clear financial records and demonstrate steady income to reassure lenders of repayment ability.

3. Keep a Low Debt-to-Income Ratio: Reduce existing debts to show financial stability and improve loan approval chances.

4. Present a Solid Business Plan: Include goals, market analysis, revenue projections, and a clear repayment strategy.

5. Add Collateral or a Co-Applicant: Offer assets or include someone with a strong credit profile to strengthen your application.

6. Build a Good Banking Relationship: Maintain a positive account history and avoid overdrafts to gain lender trust.

7. Avoid Multiple Loan Applications: Compare offers on platforms like BigMudra without hurting your credit score.

By following these tips, you can enhance your business loan eligibility and increase approval odds.

Conclusion

Improving your eligibility for a business loan requires a combination of strong financial health, a solid business plan, and responsible credit management. By maintaining a good credit score, ensuring steady revenue streams, and avoiding excessive debt, you can increase your chances of securing a business loan. Additionally, keeping your financial documents organized, demonstrating business stability, and considering a co-applicant or collateral can further strengthen your application. By following these steps, you can position yourself to secure a business loan with favorable terms and support the growth of your business

FAQs

1. What credit score is needed for a business loan?
   A credit score of 680 or higher is generally preferred by lenders for business loans. A higher score can improve your chances of approval and help you secure lower interest rates.

2. Can collateral improve my business loan eligibility?
   Yes, offering collateral can increase your chances of approval, as it reduces the lender’s risk. It may also help you secure a larger loan amount or better interest rates.

3. Does my business’s revenue affect loan eligibility?
   Yes, lenders often evaluate your business’s revenue to ensure you have the financial capacity to repay the loan. Consistent and sufficient revenue improves your eligibility.

4. How does my business’s age impact loan approval?
   Most lenders prefer businesses that have been operational for at least 2 years. Older businesses are often seen as more stable and less risky.

5. Where can I compare business loan offers without affecting my credit score?
   You can use online financial marketplaces (like BigMudra) to compare business loan offers without impacting your credit score. These platforms allow you to explore multiple options and choose the best fit for your business needs.