Once a business has identified the need for small business funding, the next question is to check the eligibility for unsecured business loans. Fintech lenders have relaxed criteria to avail small business loans, with the absence of collateral cover. After the loan applicant submits the online loan application and submits the relevant documentation, the fintech lender conducts the due diligence of the applicant and the small business on the following parameters:
- Turnover limit: Most NBFCs mandate a minimum turnover of Rs 40 lakhs. The lender is primarily concerned with the repayment capability of the borrower. Hence a healthy revenue growth is a strong indicator of the payment capacity of the small business.
- Vintage: Many lenders insist on an operational period of at least 3 years. Since the business loan is being extended towards viability and feasibility and the business performance metrics. In case of a period of shutdown during the 3-year business purposes, this is a basic criterion. This indicates the strength of the business model, it is period, this reflects poorly on business sustainability. However, if the business unit has 2 years of audited financials and it meets the credit acceptance criteria of the lender, then a loan would be offered.
- GST documentation: This is critical as it shows the legal compliance on part of the business. Every lender would opt to lend a business loan to a legally sound business as it reduces the financial risk of the lender.
- Bank Statements: NBFCs insist on the bank statements of the last 6 months. This provides an estimate of the turnover size and helps decide the amount of business loan to be sanctioned.
- Income tax Returns of the Business owner: Since ultimately a business organization, after piercing the corporate veil, is run by the management and promoters. Hence it is crucial that the business owners are law abiding. Hence NBFCs collect the IT returns filed in the individual capacity of the business owner as well.
- Age limit of the loan applicant: The loan applicant age group should range from 21 -65 years i.e. the working age group. This ensures that in case of the shortfall from the business income, the income of the loan applicant or co-applicant is also present to augment the EMI repayment to the lender. This acts as a safeguard for the lender.
- Credit Rating: The lender would evaluate the credit standing of each individual applicant before processing the loan application. A good credit score will improve the probability of loan approval with higher flexibility as regards payment structure and favorable terms. Defaults on payments, fraudulent activities, and huge outstanding dues will adversely impact the chance of obtaining small business funding. Further, in case of rejection by banks, there are still chances of obtaining unsecured business loans from fintech lenders, provided one has not indulged in intentional malpractices.
- Employer background: If the employer with whom the applicant was working with, in the past, prior to the commencement of the business, has a bad reputation in the market, there is a high likelihood of the loan application getting rejected. The employer should have a good credit rating.
- Criminal Cases: If ever the loan applicant has been found guilty in a criminal act or been a suspect in a criminal case, there is absolutely no chance of obtaining a business loan. Every lender would only be willing to extend loans to law-abiding citizens with a good track record as regards creditworthiness and legal compliance.
- Stability of the business: This is a critical aspect for consideration of business loan. Lenders lend to business units with a stable income, derived from legal business operations and reasonable profit margins. This is especially relevant for fintech lenders, which do not require collateral cover and extend unsecured business loans solely on the financial strength of the business.
Broadly, one can infer that business loans are extended to business units, with a minimum turnover size, adequate legal compliance of GST and IT Laws, a profit-making entity with regular, stable income prospects and promising business model.