Starting or expanding a business often requires financing beyond your personal savings. Business loans allow you to access the capital you need to turn your business ideas into reality. However, qualifying for a business loan requires careful planning and preparation. This blog provides a step-by-step guide on how to apply for and get approved for a business loan in India.
How to Apply for a Business Loan and Get Approval
Keep the following points in mind when getting approval for your business loan.
Understand the Eligibility Criteria
To get easy approval, you need to make sure that you meet the eligibility criteria of the lending institution you are approaching for your business loan. Typically, most financial institutions look for certain things that include:
Time in Business
Most banks and NBFCs mandate that businesses should have completed 2-3 years of operations before applying. For startups less than 2 years old, options are short but not limited. They can apply for specialised startup loans offered by credit unions and other lending companies.
Annual Business Revenue
Loan providers will assess your current annual revenue as well as revenue growth over the last 3 years. Most financial institutions have a minimum annual turnover requirement of Rs. 40-50 lakhs for standard business loans.
Profitability
Your business should have been profit-making for the last 2 years at the minimum. Some positive cash flows in the recent past are also required.
Credit Score
Having a personal credit score of 650 and above is a must. Individual promoters/partners may also be evaluated. Rectify errors in your credit report before applying.
Collateral
Loans above Rs. 10 lakhs generally require 100% security in the form of acceptable collateral equal to or exceeding the loan value. This could include property, fixed deposits, securities, etc.
Pick financial institutions whose eligibility criteria your business can satisfy. Having collateral and a solid financial track record will improve your chances.
You can be self-employed or a business owner, but your age should not exceed 70 years at the time of loan completion. Checking the eligibility upfront can ensure faster processing of your business loan.
Prepare the Required Documents
Once you have reviewed the eligibility criteria, prepare all the documents you must submit. Lending institutions will verify your identity, cash flows, and business outlook before approving your online business loan. While the basic KYC (Know Your Customer) proofs establish your identity and place of residence, an income statement assures the financial institution of your repayment capacity.
Business loan providers will ask for documentation to verify your eligibility and assess risk. Keep these documents ready before applying:
Identity Proof
You must submit proof of photo ID from company owners/directors.
Address Proof
It is compulsory to submit proof of address. You can submit documents such as your Aadhar Card, electricity bills, driving license, etc., as proof of your address.
Income Proof
You can submit your bank statements covering the past six months or your income tax returns for the last three financial years. As a business owner, you must also submit audited accounts and the cash flow statement for the previous financial year.
Asset Purchase Proof
If you are taking a loan to buy an asset, you must furnish the proforma invoice, sale deed, and details of the margin money. If you purchase an asset already used by someone else, you must also submit its valuation report.
Business Registration Documents
Registration Certificate, GST Certificate, MSME Registration etc.
Tax Documents
Income Tax Returns (ITRs) for the last 3 years, audited financial statements, bank statements, etc.
Business Plan
Startups or new ventures without financial history must detail business ideas, models, market analyses, forecasts, etc.
Collateral Documents
Ownership papers if you pledge any asset as collateral.
Estimate Your Loan Amount
Estimating the required loan amount is pivotal for getting your business loan approved faster. When determining the ideal borrowing amount:
- Assess current and future capital expenditures to buy assets, equipment, technology, etc. Account for any renovations or capacity expansion plans.
- Project working capital needs for the next 12-18 months, including inventory, payroll, utilities and other operating expenses.
- Gauge the total value of collateral you can offer—property, fixed deposits, etc. Most loan providers approve loans up to 65-75% of the collateral value.
- Factor your existing debt obligations on other loans so you don't over-leverage.
- Use revenue projections to size the loan amount your cash flows can support. Be conservative in forecasts.
The loan amount requested should adequately meet your needs without being excessive. When in doubt, estimate on the lower side. You can avail of another loan as the business grows profitably.
Opting for lower ticket-size loans also allows faster processing. Loan providers perceive higher amounts as riskier and evaluate them more stringently. Aligning your loan amount according to genuine business needs and repayment ability can go a long way in getting a quick nod of approval from the lending company.
Final Words
Following these steps can help you submit a strong, well-prepared business loan application and get funding approval. When unexpected expenses arise, having access to quick funds becomes crucial for any business.
FAQs
1. Can I get a business loan online?
Banks and NBFCs offer online business loans. In some of the cases, you can apply and receive approval completely online.
2. What is the minimum and maximum amount I can borrow through a business loan?
The minimum and maximum business loan amount depends on the lending institution. The exact loan amount provided will depend on your company's specific financing needs and eligibility criteria.
3. How do you get a business loan without collateral?
To qualify for an unsecured business loan without collateral, generally your company must operate for at least 3 years. You also must submit all the necessary documents for verification. The eligibility criteria may vary depending on your business and other factors. Please seek guidance from our representative when applying.
4. What is better - a business loan or a line of credit?
A business loan is suitable if you need a large lump sum for one-time use, like buying machinery or commercial space. But if you need regular financing for working capital, a line of credit that allows you to draw out money multiple times flexibly as needed is more useful.
5. Can I use the business loan for any business purposes?
Yes, once disbursed, you can use the loan amount towards any valid company expense you see suitable, such as inventory, equipment, salaries, or operational costs. The usage is flexible.
