Factors Contributing to Business Loan Approval


In the era of development and innovation, entrepreneurship is the latest craze and India is not far behind in the race. Business, especially with new entrepreneurs is quite a fad and fast growing as well. Hence, comes the need for funding the business and its growth with loans!

Business Loans are quite a common phenomenon especially for small and medium scale enterprises.  Most of the major banks in India extend business loans to proprietorship firms, partnership firms and private limited and public limited companies. Thus businesses can be funded up to the sanctioned amount through the loans and the features of all such loans are quite similar in nature but yet they differ in terms of interest rates, tenure, etc. across banks and NBFCs.

Credit Guarantee Scheme for Micro and Small Enterprises

Most banks and other prominent NBFCs have quite a stringent procedure to offer business loans with detailed documentation required, especially if it is not covered by collaterals. Thus, the smaller and relatively newer businesses suffer the most in this regard. There is, however, a method of small businesses to apply for collateral-free loans through CGTMSE, i.e. Credit Guarantee Fund Trust (CGTSME) for Micro and Small Enterprises (MSEs) for up to Rs 1 crore.

CGTMSE has been set up by the Ministry of Micro, Small & Medium Enterprises (MSME) to support first generation entrepreneurs by offering Credit Guarantee Scheme based on project viability and credit  rating of the promoters, proprietor etc.. The credit guarantee scheme is available for up to 75%-80% of the sanctioned amount such that it would be payable in case the business is declared NPA or non-performing assets.

Eligibility Criteria for Business Loans:

Although it varies from bank to bank, the basic criteria are more or less the same, such as:

  • People of 25 to 65 years of age only
  • Business should have been:

    1. Continuing for at least 3 years
    2. Profitability in the last 2 years at least
    3. Proper Income Tax Return of Minimum Rs 3 Lacs
    4. Minimum turnover of Rs.40 Lacs for Proprietorship, Partnership Firm, Pvt. Ltd. Companies, LTD Companies (closely held), Societies, and Trusts is needed.
    5. With a Positive Net worth

Along with this the basic Know Your Customer details are needed for availing the loan such as:

  • Pan card and Address Proof of the company and its promoters
  • Last 3 years’ audited balance sheet of the company and the IT Return
  • Last 3 years’ Sales Tax Return of the business
  • Copy of Bank Account statement clearly showing nature of transactions in the last 12 months

Along with

  • A detailed Business Plan for the utility of the money
  • Generation of revenue
  • Cost of running the business
  • And How the repayment of the loan has been structured

Factors Contributing to the Amount of Business Loans

Here are some of them penned down one by one, in no particular order.

  • Credit Rating or CIBIL Score of Individual Promoters or Proprietors or Directors

    Credit rating is an evaluation of the credit worthiness of a debtor, especially a business (company) or a government, but not individual consumers. The rating is done by a credit rating agency such as CRISIL and ICRA on the debtor’s ability to repay the loan amount which is usually based on personal credit history with personal or home loans, credit card payments, etc. This is done to evaluate the likelihood of loan default.

    CIBIL score is a an evidence of credit worthiness of an individual again depending upon personal credit history in terms of other loan payments, credit card payments and settlement, EMI clearance, etc.

    Credit rating is a very important factor and is directly proportional to the amount of loan that can be raised for the business. The credit worthiness of the business is one of the most important factors that are considered while disbursal.

  • Cash Flow Status of the business in terms of cash credit history with outstanding payments, liabilities, etc.

    Basically the banks due their bit of due diligence to check the financial health of the business before funding it so that the chances of recovery or default is categorically analysed. Loans depend a lot on reliable cash flow statements of the business.

    In fact, business has to detail what they intend to do with the loan amount and how they plan to generate the income from their business to repay the loan.

Collaterals are most commonly seen as real property, business inventory, cash savings or deposits, vehicles and equipment.

Thus, depending upon the factors and the business viability as analysed by the project analyst along with the papers submitted and the onsite report of the credit manager, the amount of loan disbursal is determined.

  • Type of business

    Most businesses can be classified depending upon the nature of their business into Cyclical, Defensive or Growth company. It also depends upon the stage and maturity of the business.

    Defensive companies are relatively immune to the ups and downs of the economy and perform equally good or bad under all conditions. For example Health care, Household and Personal Care companies are usually defensive with the business being non cyclical in nature.

    Cyclical companies, on the other hand, depend very much on the ups and downs of the economy and perform in tandem with the economic cycle. For example, car manufacturer is a cyclical company since people buy more cars if the economy is on a boom.

    Growth companies are usually the newer businesses that grow exponentially in the initial phases of the business with a great idea before the business matures and stabilizes as a defensive company.

    So, the amount of loan and the loan viability depends a lot on the type of business it is funding and which stage of development it is in and the business and expansion plans in the future along with the economic condition of the country which plays a vital role in the business and its growth.

  • Collateral

    Last but not the least, collateral is the easiest way to fund a loan as it becomes a secured loan as against an unsecured one without collateral like personal loan. The collateral can be provided on a personal guarantee by the promoters of the company or the sole proprietor to avail the loan and the banks find it much easier to provide and sanction the same as it becomes a secured loan with collateral.

    Collaterals are most commonly seen as real property, business inventory, cash savings or deposits, vehicles and equipment.

    Thus, depending upon the factors and the business viability as analysed by the project analyst along with the papers submitted and the onsite report of the credit manager, the amount of loan disbursal is determined.