April 18, 2024


Savvy business masters

Key Factors That Banks And Other Financial Lenders Look For While Giving A Business Loan

Business loans play an important role in the Indian economy. To run a company smoothly, timely finance is of absolute necessity. It is crucial to the success of any company to get the right form of financing at the right time.

Businesses have different financial needs, such as working capital, trade financing, revolving credit, bank loans, invoice discounting, merchant cash advance, and more. From time to time, they also need term loans to purchase properties, buy raw materials, boost cash flow and so on. 

In the business loan market, banks and NBFCs in India play a vital role. There are different government schemes for the MSME sector and these schemes are introduced to the customers via banks and NBFCs. In order to meet their business financing needs, even multinational corporations often rely on banks and NBFCs. While the processing of applications is differentiated from that of MSMEs, the intent of these loans remains the same.

If you’re considering a business loan, you may be wondering how the lender will decide the outcome of the loan. There are several factors a lender considers before sanctioning a business loan. 

What factors do banks and financial institutions look for before sanctioning a business loan? 

Credit Score and Report: Your credit score is your credibility! It is necessary for the banks to be assured of the borrower’s potential to repay the loan. That’s assured by a high credit score. The bank would review the credit score of the organization to assess its reputation. They look at your repayment history and other loans and liabilities you have. Healthy credit history and a good credit score make it easy to get the loan at affordable interest rates.

Stability of the Company: In order to approve the loan, the financial stability of the business is necessary. The revenue and benefit aspects of the firm would be investigated by banks. This can be derived from your experience of industry and your firm’s tenure. Banks usually favour firms with a term of at least 2-3 years to approve the loan. The older the company and stronger the track record, the greater the probability of having a loan from a company with a favourable interest rate and other conditions.

Profitability & Sustainability of business: Another relevant condition is whether the business can make a significant profit. Banks wouldn’t like to lend a company capital that doesn’t do so well. The bank could ask you for the profit & loss statement of the last two years. The viability and income of your organisation play an important role in deciding whether or not a loan can be granted to a corporation.

Present Relationship with the Lender: Also relevant is the current status with the bank. The bank is trying to check all of the bank partnerships with the company. Your account’s cash balance and transfers, any previous loans you have with the bank, and even your repayment history are checked by the bank before processing the loan. 

Collateral: While many government programs give cheap business loans without collateral, the borrower is generally required to pledge some type of collateral to get decent credit terms and interest rates that he is happy with. The government guidelines note that collateral is not compulsory and the applicant is free to provide any. The pledge of collateral serves as an external credit protection, facilitating higher loan volumes and lower interest rates.

Is there any way to improve my business loan eligibility?

Of course, you can! There are a few simple steps you can follow to increase your Business Loan Eligibility; 

Prepare a Strong Business Plan: Make sure you have a sound business plan before filing your loan application. For the near future, the proposal should elaborate on the profitability. It should demonstrate reliability and development while underlining to the creditor the protection and risk factors of the firm. A well-executed business strategy will reinforce the lender’s confidence in you in sanctioning a business loan.

Provide relevant documentation: Business Loan applications include a variety of supporting documentation related to the proposed project and your existing establishment. To help your business plan, make sure that you have all the latest documentation and facts. Avoid any inaccurate or inconsistent facts or documents. Proper paperwork guarantees your genuineness to the investor.

Gain knowledge regarding specialized business loans: Periodically, banks start providing special incentives and promotions on business loans. To make the most of them, keep a keen eye out for these promotional deals. With favourable terms and conditions, they may even incorporate certain limited time schemes for particular business owners. With all the new offerings and discounts, it is nice to be informed so that you can get a good loan for your company.

Go for Government Schemes: There are various schemes for the Government of India to assist the MSME industry. For the benefit of entrepreneurs in this country, they have the CGTMSE credit scheme, The MUDRA Yojana, The PMMY Scheme and many more. As the key point of touch for these projects, banks are named. Carefully read through these systems and pick the right one to suit your needs. To support you with these schemes, the government has websites and other tools. Make use of them to get the most out of the systems of these governments.

Are there any other factors to keep in mind while applying for business loans?

Age limit to apply for a Business Loan

Minimum – 21 years

Maximum – 65 years

Nevertheless, depending on the age of the company, most business loans are issued. The firms have to have been working with a strong financial status for at least 2-3 years.

Annual Turnover of the Company

Business loans are issued on the basis of companies’ annual turnover. The minimum consideration is a turnover of Rs. 40 lakhs. A minimum of Rs.1.5 lakhs per annum should be the minimum annual income for self-employed professionals.


Securing the requisite credit at the right time is essential to any business venture. Capital investment and operating expenses are required for every company to function smoothly. Major corporations have never had much trouble in obtaining credit with their firms, given the belief that they provide the most job opportunities to the general public. It is surprising, though, to find out that large factories hire just 1.25 crore people across the country. It is the small-scale enterprises that come under the informal employment that support about 12 people across the country. Despite this reality, there is still a lack of credit facilities.

Business loans are made available to small business owners as well as international corporations. Their income outlook is different and their company loan requirements are different. The bank would like to properly determine the eligibility of the individuals to arrive at the best loan terms. Numerous banks and financial institutions offer business loans to eligible applicants. They have some stringent criteria requirements to approve a business loan to an entity.

Try to be aware of the factors that banks look for so that you can take the right steps and improve your chances of securing the loan.