Business Loan: Eligibility Criteria & Documents

A bank loan is a very good option for many entrepreneurs starting a business in the traditional areas of service, manufacturing, and trading. Though there has been a lot of interest and excitement around angel or private equity funding in recent years, bank loans continue to fund the largest number of businesses in India. With a strong banking system and network of lending Non-Banking Financial Companies (NBFCs), an Entrepreneur can easily obtain business loan for a startup. This article looks at some of the main criteria for business loan eligibility.

Age Eligibility	Turnover Limit	Age of Business	Interest Rates	Repayment Tenure
21 – 65 years	Will be defined by the Bank/NBFC	At least 2 years	13 – 24 %	3 months – 7 years

Scheme or Product Fit

Unlike equity funding, banks have a strong structure and mechanism for approving or rejecting bank loan sanctions - based on various parameters. Therefore, before applying for a business loan, the Entrepreneur must make him/herself familiar with the schemes available in the bank for business loans and apply for the right one. For instance, many banks operate a MUDRA Loan Scheme, a scheme for providing unsecured business loans of less than Rs.10 lakhs for new Entrepreneurs. A new Entrepreneur applying under such a scheme will likely have a higher chance of success than applying for a scheme under which the Entrepreneur does not meet the bank's criteria for lending.

Documents

Bankers follow specific procedures while processing loan applications and require certain documents for processing a loan proposal. Therefore, to even be considered for a bank loan, the Entrepreneur must compile and submit to the Banker good documentation. The following are some of the documents required for processing of a business loan application:

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 indicative only. The Banker, at his/her discretion, might request more or less information based on the credit profile of the bank loan applicant. Further, submission of the above documents does not ensure sanction of the loan. The above documents must be submitted, and the banker will still take the credit opinion based on various factors.

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Eligibility Criteria to Get a Business Loan

The following sections specify the eligibility criteria to get a business loan.

Profit & Cash Flow

Unlike angel or equity funders, bankers look for profit and positive cash flow to lend. Bankers do not get equity in the company and are eligible only to receive interest on the funds loaned. Hence, Bankers would not consider the business's long-term profitability / positive cash flow - projected to be generated in the future. Bankers tend only to fund proposals with profitability and positive cash-flow after the initial setting-up period. Therefore, as a borrower, you must show that the business performance is positive, that operations are profitable, and that you generate sufficient cash to cover all financial commitments.

Promoters Contribution or Margin

To avail of any loan, the promoter must have and must invest the Promoter's Contribution or Margin. Banks do not lend 100% of the funds required for equipment or working capital investment. Hence, the promoter must have funds available to meet the margin requirements stipulated in the loan conditions. For instance, if an Entrepreneur wants to purchase machinery worth Rs.10 lakhs, the Bank would sanction an equipment loan with a margin of 20% (assumed number). In this case, the bank would provide a loan of Rs. 8 lakhs and the promoter would have to invest his/her funds worth Rs. 2 lakhs to purchase the machinery. Based on the nature of the loan and the requirements of the Entrepreneur, the margin requirement can vary anywhere between 50% - 10%.

Primary Security

Most business loan schemes provided by banks require a primary security to be created from the funds provided by the Banks. If the business loan is availed for machinery, then the purchased machinery would be termed primary security. If the business loan is availed for working capital (i.e., raw material or stocks), then the primary security would be the raw material, stocks, or receivables. In case of default in loan payments, the Banker would have the right to hypothecate the primary securities and sell to recoup losses.

Banks tend to prefer projects wherein strong primary collateral is created, which can be easily hypothecated and sold by the Bank. For example, large machinery would be considered a strong primary security, whereas interior decorations may be considered a weak primary security - as they cannot be easily taken and sold.

Collateral Security

In addition to primary security, which by default would be hypothecated by the Bank, Bankers tend to request borrowers to provide collateral security. Bankers prefer collateral security in the form of residential property or commercial property. Bankers cannot accept agricultural property as collateral security - as agricultural property can be auctioned off under the SARFESI Act. There are various unsecured business loan schemes; however, providing strong collateral security would tremendously increase the chances of obtaining a bank loan.

Promoters Experience

In addition to the above criteria, Banks also provide weightage to the promoter's age, education, experience, expertise and background. While there are no set rules, Bankers tend to prefer Entrepreneurs with good experience and expertise with the business for which a loan is requested.

Promoters Reputation

Bankers look for a blemish-free loan repayment track record while sanctioning bank loans. Bank statements of up to one year and CIBIL score would be checked by the Banker before sanctioning any loan facilities. In case of any cheque bounce, low CIBIL score, or repayment defaults, the chance of obtaining a bank loan can be severely degraded. Thus, it is good for loan applicants to check their CIBIL score periodically - especially if they are about to apply for a bank loan.

Comparison of the Interest Rate & Loan Amount Ranges offered by the Top Bank/NBFCs

Below, we have given the approximate comparison of the interest rates and loan amounts offered by the Top Bank/NBFCs.

Bank/ NBFCs	Interest Rate Range	Loan Amount Range	Loan Type
SBI	6.5% - 15.5%	₹1 lakh - ₹25 crore	Secured & Unsecured
HDFC Bank	7.0% - 22.5%	₹2 lakh - ₹50 crore	Secured & Unsecured
ICICI Bank	7.5% - 18.0%	₹5 lakh - ₹25 crore	Secured & Unsecured
Axis Bank	8.0% - 20.0%	₹10 lakh - ₹50 crore	Secured & Unsecured
IDFC First Bank	7.9% - 17.9%	₹5 lakh - ₹20 crore	Secured & Unsecured
Kotak Mahindra Bank	8.5% - 21.0%	₹25 lakh - ₹50 crore	Secured & Unsecured
Bajaj Finance	8.0% - 22.0%	₹1 lakh - ₹20 crore	Secured & Unsecured
TATA Capital	7.5% - 18.5%	₹5 lakh - ₹25 crore	Secured & Unsecured
Capital First	8.5% - 20.0%	₹1 lakh - ₹10 crore	Secured & Unsecured