7 Essential Eligibility Requirements You Must Know Before Applying for a Business Loan

A business struggling with finances may find a business loan to be of great help.

It can be used for a variety of things, including acquiring new equipment and increasing working capital. This essay will examine seven key elements that everyone applying for a business loan should take into account.

When you take the leap from a salaried job to becoming a business owner, your responsibilities experience a notable surge. You juggle numerous tasks single-handedly, ensuring the business’s trajectory toward success. The hours you spend to cover substantial distances, all in the pursuit of maintaining unhindered business operations and fostering growth. Here a business loan can help. So, that’s why we decided to list out the 7 key requirements you should know while applying for business loans.

7 Essential Requirements For A Business Loan

As a borrower you must fullfill the following requirements to avail a business loan.

1. Aim of Getting a Business Loan

Individuals, business owners, startups, independent contractors, business owners, and MSMEs can all benefit greatly from business loans. These loans can be used for a variety of purposes, such as obtaining extra or quick cash to boost working capital, launching new projects, buying equipment or machinery, paying rent and salaries, settling debts, or controlling cash flow. However, eligibility for business loan differs with each lender. So, every lender will assess your loan application based on the specific terms and conditions of their firm.

2. Plan Of Your Business Venture

While looking for a successful business loan approval, a strong business strategy is crucial.

Make sure your business plan outlines your goals, objectives, and plans for success before filing a loan application for a firm.  Financial projections that demonstrate your ability to repay the loan should also be included. Lenders demand proof that you have a thorough understanding of your company and a plan for its future expansion. A well-written business plan can highlight your goals and increase your chances of getting a loan approved. Nowadays, a lot of lenders provide the convenience of online business loan applications, which makes it easier for business owners to get finance from the comfort of their homes or offices.

3. Business Industry and Scale

Each industry carries a distinct level of risk, with certain sectors like restaurants and beauty services classified as high-risk due to potential revenue inconsistency. Moreover, certain industries are often excluded by numerous lenders. This category encompasses areas such as adult entertainment, drug-related establishments, gambling, and money service operations.  

4. Annual Revenue

Many lenders impose a minimum threshold on monthly or yearly revenue for consideration. The exact cash flow requirement varies among lenders. In cases where the business generates low revenue, alternative financing options such as invoice factoring might be necessary. Yet, there are several renowned financial firms like IIFL Securities which offer business loans considering the requirements of an applicant.

5. Your Business and Personal Credit Scores

Both your business and personal credit scores hold substantial significance in the eligibility for business loans. These ratings give creditors a way to evaluate your creditworthiness and ability to repay loans on time. You can obtain your credit score and report from available credit bureaus or utilise online platforms offering complimentary access to this information. If your credit score falls short of the desired standard, take measures to enhance it before proceeding with the loan application.

For government-backed or conventional bank small-business loans, a good personal credit score (typically around 690 or higher) or excellent business credit is generally required for eligibility. In contrast, online lenders may adopt a more lenient stance toward credit scores, placing greater emphasis on your business’s cash flow and track record. Some online lenders may necessitate a minimum personal credit score of 500. 

6. Financial Statements

Presenting financial statements is a fundamental prerequisite for qualifying for a business loan. Lenders want to ensure that your company makes enough money to pay back the loan. Balance sheets, earnings and expenses statements, and cash flow statements are all examples of financial statements that give lenders an overview of your company’s financial health and demonstrate its capacity to repay loans. It is essential to maintain correct financial records in order to speed up the production of these statements.

7. Collateral

Lenders might stipulate collateral as security for the loan. Collateral refers to any asset that the lender can seize and sell in case of loan default. Property, equipment, and inventory are common forms of collateral. In the event of loan default, collateral gives lenders peace of mind that they can recoup their money.

While collateral-free business loans are also accessible, they could involve slightly higher business loan interest rates due to increased risk for the lender. Evaluating interest rates and repayment terms diligently before accepting a loan is imperative. When applying for a business loan, using an EMI calculator will help you estimate the monthly loan payments and manage your budget.

Necessary Documents

To facilitate a seamless acquisition of a business loan, it is imperative to stay well-prepared and have all requisite documents readily available. The following documents are typically requested:

• Photo Identity Proof
• Proof of Business
• Income Proof
• Bank Statements
• KYC Documents

Conclusion

The decision to apply for a business loan necessitates careful consideration. You are prepared to make an informed and responsible decision for your business financing needs if you have a thorough awareness of the seven essential aspects to consider before submitting a loan application.