5 Subtle Criteria That Impact Your Eligibility For That Business Loan

Loan

In India, the credit demand by the MSMEs is at around $490 billion while the overall supply from formal sources stands at a scanty $192 billion, according to The Reserve Bank of India (RBI).

 Government of India has introduced several schemes to bridge this gap, For example, the PM MUDRA, PM SVANIDHI, the Emergency Credit Line Guarantee Scheme. However, these schemes haven’t been able to reach the envisaged reach. The disbursements are slow, primarily due to lack of credit history, lack of appropriate documents, and complicated application process.

In order to counter these issues, RBI rolled out the ‘Account Aggregator’ framework in September 2021.

The framework aims at improving accessibility to financial data thereby greasing the wheels of the credit industry and making the finances available on time and with ease. The Account Aggregators (AA) make ‘bank data’ accessible to digital lending apps, allowing them to lend efficiently and confidently.

With the growing adaptation of the AA network, with ‘Fintech Credit’ facilities such as peer-to-peer lending and ‘loan-based crowdfunding’ credit supply to MSMEs is expected to rise. However, an analysis of micro-loan applications revealed that many small businesses in India stumble on loan eligibility and that entrepreneurs would fare better if they took a few informed steps to improve their chances.

5 Subtler Criteria Impacting Loan Eligibility:

Apart from the “Five Cs” of credit – capacity, collateral, capital, character and conditions, the following are a few of the influencers of disbursement decision:

  1. Applicant’s postal pincode – certain locations are given higher preference by the lending institutions
  2. Loan amount – Small loans and working capital loans have had a higher default rate, hence NBFCs generally consider a higher ticket value than the small ticket loans.
  3. Business type – proprietorship is given preference over partnership or private limited company.
  4. Business age – Older the better is an adage best suited here. Businesses that have survived longer are preferred over the ones with less than 10 years lifespan.
  5. Presence of UPI identity of the applicant

Although different lenders value these parameters differently, it is important to note that armed with this knowledge an applicant can tweak the application so as to get the system working for him/her. For example – Women applicants have a higher chance of approval, while candidates older than 30 are more likely to be approved.

All said and done, your Credit Score is one of the primary factors influencing your loan approval chances.

Impact of Credit Score on Interest Rate of Business Loan

In the case of small businesses especially sole proprietary and partnership firms, a personal credit score equates business credit score. The lenders evaluate the credit profile of business owners while considering the loan application.  

In India, credit scores provided by bureaus like TransUnion CIBIL, Equifax, Experian, and CRIF Highmark range from 300 to 900.

A credit score is a metric of one’s creditworthiness. It reflects how prompt one has been with repayment of debt and thus forms the base while calculating the propensity of default in the future. To avail credit at favourable terms, tracking credit score and working on improving it is essential.

Greater Negotiation Power with a Credit Score of 750-900:

With a credit score of 750+ one can not just get a business loan approval easily, but also demand lower interest rates and longer tenure. The lenders are highly likely to accommodate these demands since the repayment is assured.

Get a Business Loan on the Lender’s Terms with a Credit Score of 650-749:

A credit score of 650+ makes loan approval highly probable. However, one loses the power to negotiate loan terms. The loan received might be at a higher than the desired rate of interest. If there is no urgent requirement of the credit, one must consider delaying the procurement of credit and work on improving the credit score.

Take Steps to Increase the Credit Score from below 650 level and be Eligible for a Business Loan:

With a credit score lower than 650, there is a high chance of rejection of loan application. This would affect the credit score negatively. Even if the loan is approved, the interest rate demanded by the borrower will be high considering the risk perceived. It would be thus wise to take steps to improve one’s credit score and bring it above 650, before applying for a loan.

Keeping a track of your credit score and working on improving it is a great way of ensuring easy access to credit as and when required. Applying for a secured loan or having someone with a good credit score co-sign the loan application, improves the chances of loan approval.

In case of any further queries related to business funding, feel free to get in touch with our credit advisors for a free consultation.