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Tata Capital > Blog > Loan for Business > 5 Factors that Affect Your Business Loan Eligibility

Loan for Business

5 Factors that Affect Your Business Loan Eligibility

5 Factors that Affect Your Business Loan Eligibility

Keeping track of financial requirements is a critical aspect of running a successful business. But what happens when you find yourself strapped for cash? In such a case, business loans can come to your financial aid. Whether you need funds to meet day-to-day expenses or set up a new factory, business credit is the way to go and get things done. That said, you must be eligible to get the required funding without a hassle.

Here are 5 factors that affect your business loan eligibility.

#1. Type of business

Some businesses are riskier than others, and hence, getting loan approval for them is difficult. Lenders want to ensure that the business is financially sound and can repay the loan, so they consider the type of business when assessing loan eligibility.

For example, a well-established business in a stable industry with a solid financial track record may have a better chance of being approved for a loan. On the other hand, a startup or a business in a high-risk industry may have difficulty securing a loan because they have a limited financial history and a higher likelihood of default.

So, if your business falls under the category of risky business, you may hurt your MSME loan eligibility. Therefore, you should work on increasing its reputation. Also, make sure your business plans are clear and concise. Having a clear vision of the execution process can help establish trust with lenders and boost your chances of loan approval.

Additional Read:- Types of Business Loan Agreements You Should Know

#2. The Age of Business

The age of your business is also an essential factor for business loan eligibility. When screening your application, lenders will consider your business continuity or age. In addition, the lender would evaluate the financial stability of your business by analyzing the cash flow statement, balance sheet, and profit and loss account.

Older businesses are generally more financially secure. So lenders are more inclined to trust businesses that have been around for two or three years as compared to startups. However, there are a limited number of lenders who may provide loans to businesses with a minimum of one year in operation as long as all other requirements are met.

#3. Profitability

If your business has been in operation for more than a year, most lenders will ask for financial statements to check the company's profit potential. Therefore, to increase your unsecured business loan eligibility, it's important to have a successful and profitable business.

So, if lenders review your business's financial records, if it shows low profitability, it may lead to your loan application being declined. Additionally, it may negatively impact your company's market reputation

Although, a positive figure means better repayment capacity. In such a case, many lenders offer competitive business loan interest rates, especially for profit-making businesses. However, in the case of early-stage startups, the focus is on growth strategy instead of income.

#4. Credit score

Your credit score is probably the first and most significant factor for MSME loan eligibility. Since a high credit score is a reflection of good credit history, such applicants are favoured by the lenders. They tend to get faster approvals than people or businesses with lower credit scores.

In the case of an older business, the company’s credit history is considered. But for a new business, the credit scores of the founders are taken into account. So, if you’re planning to start a business, make sure to check and improve your credit score before applying.

An important note: Having a commendable credit history is the most important factor for unsecured business loan eligibility.

#5. Collateral

Many businesses face difficulty in obtaining loans due to the absence of sufficient collateral. This leaves business owners who don't have valuable assets to put up as collateral at a disadvantage.  Financial institutions require collateral, typically high-valued assets, to secure the loan and reduce their risk.

Therefore, various financial institutions approve loans quickly if applicants provide some form of collateral. If required, you can pledge fixed assets, stocks of the company, equipment, and others as collateral to the lender. Providing collateral against the loan improves your chances of being business loan eligible.

Alternatively, you can choose a lender offering collateral-free loans. Tata Capital, for example, provides collateral-free business finance at competitive business loan interest rates.

Additional Read:- When You Need to Opt for Business Loan

To sum up

If you’re looking for funds to start a business or scale one, keep a close watch on your credit rating and the financial performance of your business. With little effort, you can secure business finance and give a boost or head start to your entrepreneurial journey.

If you’re looking for a financing option for your business, turn to Tata Capital. We have various options and exciting interest rates. Visit our website now to apply. Use business loan EMI calculator to find out your EMI amount instantly.

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