Understanding the Factors Affecting Business Loan Eligibility in 2024

An MSME business loan is designed for the funding of small businesses. Businesses need capital for variety of purposes such as expansion, purchasing equipment, inventory management, cash flows during period where the business activity is slow. For the business owners to avail the loan, they first have to meet the eligibility requirement. Here in this article, we will see the different factors that affect MSME loan including the type of company for which a business loan would be sanctioned.

Business loan offers SMEs a massive growth opportunity which may not be available otherwise. Business loan comes with quick and easy application process and businesses can avail loan upto 2 crores at competitive interest rates. MSME business loan emerges as the best option for industries requiring funds for their operation. Also, some business loans come with tax benefits. Here we would see how company type impacts SME business loan eligibility.

1. Sole Proprietorship

In a sole proprietorship, where the company is managed by a single individual, the individual owner’s credit score is a key factor in determining the amount they would receive.

2. Partnership

Partnerships could be more favourable for lenders as the borrowing is a shared responsibility in this case. The combined creditworthiness of the partner may be considered for loan eligibility

3. Private and Public limited companies

These companies have distinct legal identities and credit profiles from their owners. Personal credit score of the owner do not have much value here. Business loan lenders, however, would want to check the financial health of the company, guarantees from owners/shareholders

What are the factors affecting Business Loan eligibility

Age: Lenders typically prefer business that have been in operation atleast for three years

Profitability: Business that demonstrates growth over time have a better luck in securing loan at favorable terms. This prospect can be challenging for companies, as the lenders look for companies that prioritize growth over income

Debt-to-income-ratio:  Debt-to-income-ratio shows how much debt your business has compared to the income it generates. A lower ratio of less than 30% or so indicates better financial stability and a higher chance of approval

Credit Score: A strong credit score irrespective of whether the company is Sole Proprietorship or partnership or private limited companies is required for loan sanctioning. A good credit score reinforces faith in the lenders about your repaying ability. Usually, a credit score of 750+ is generally preferred. You can check your free credit score in loan aggregator sites like Fincover, which lets you apply for business loan online without any hassles.

Company registration: Lenders typically prefer businesses that are registered with the government. It boosts the credibility of organization and also it is less risky for the lenders

Track record: A Business that has a well-established track record is more likely to be viewed in favor by the lenders compared to businesses without experience.

How to apply for a MSME Business loan?

Mentioned below is the process which you have to follow while applying for a business loan

Research different lenders: It is important to take stock of your requirement before applying for a loan. Evaluate how much you would require. Once you’ve done this part, compare various parameters like interest rate, tenure, fees and charges from multiple lenders. You can check such parameters easily at Business Loan aggregator sites like Fincover, which will give you a one-window view of these parameters. By doing this, you can easily pick the one that fits your requirement the most

Check your eligibility: Ensure your business meets the eligibility requirement of the lenders with low interest rates and favorable repayment terms. It includes various factors like business age, applicant’s age, turnover, profits, and so on

Keep the Documents ready: Once you’ve checked your eligibility, the next process is to keep all the documents ready so that you submit them instantly. Make sure to own a soft copy of them as most lenders have digital application process for loan. Keep the documents such as Registration documents, financial statements, tax returns, and other documents as requested by the lender

Apply and wait for approval: Carefully fill the application form and submit the required documents. The lender will assess your application and decide whether to approve or reject based on your creditworthiness

Conclusion

MSME Business loan can be a great source of funding for small and mid-size companies and can greatly assist you with growth and expansion. Having a good understanding about the application process would help you prepare a strong loan application.