Business Loan Eligibility

Business Loan Eligibility

Any Indian Resident Partnership or Proprietorship Firm, Limited or Private Limited Company or Self Employed Professional are eligible for Business loan. Lender consider various factors before providing business loans: When you apply for a loan the first and foremost aspect considered is your ability to repay. The exact criteria vary from bank to bank. To be eligible for a Business Loan, you must be:

Age:

Business loan borrower must fulfill the age criteria which is variable depending upon the banks. Your age should be between 25 and 65 years at the time of loan maturity.

Income

A regular and good source of income is one of the most important factors that a borrower can get higher loan amount. Annual turnover of your business should be more than 20 Lakhs and showing positive trends in turnover and profit for the last 2 years. Your Income Tax Returns of the last 2 years should reflect taxable income of above 2.5 Lakhs per annum.

Business Stability

A good job stability is a very crucial aspect for Business loan consideration. These numbers are flexible though, varying from bank to bank. Your business needs to be in continuity for the last 3 years showing positive trends in turnover and profit.

Existing loans

Borrowers who already have existing loans are likely to get a smaller loan amount. An existing loan reduces the repayment capacity of the borrower. However, if the borrower repayments capacity and financial capacity is good to afford an additional loan, the banks might not lower the loan amount.

Relationship with the Bank

Having a healthy relationship with the banks can be helpful when applying for a loan. Since there are chances that the borrower can get the higher loan amount at low-interest rates.

Credit or CIBIL Score:

The CIBIL Score plays a critical role in the loan application process. Whenever you apply for a loan, lenders check your CIBIL Score and Report. If the credit score is low, the lender may not even consider the application further and reject it at that point. If the credit score is high, which automatically help in availing you the maximum loan amount. Delays and defaults in paying EMIs for loans or credit cards will lower your eligibility. So, always try to maintain a good CIBIL score, i.e. 750 or above out of 900 to increase your loan eligibility.

Methods of Calculating Business Loan Eligibility

  • FOIR (Fixed Obligation Income Ratio)

In this method, your loan amount eligibility is calculated on the basis of maximum EMI or monthly installments in respect to net income. Banks or NBFCs generally accept 40 – 70% of your net income as EMI, existing obligations and credit card outstanding. If the obligations exceed bank’s norms, then bank will either reduce your loan amount or will increase the tenure of your loan.

DETERMINATION OF ELIGIBILITY – Case 1

  • Income :   50,000
  • Total EMI’s being paid :   10,000
  • EMI to Income Ration : 20% [10,000 / 50,000]
  • Rule of thumb EMI to Income Ratio: 50% [lenders assume you will need half salary for living expenses].
  • Total Borrowing Capacity : 50% *    50,000 =   25,000
  • Total Incremental EMI that individual can afford :  25,000 –   10,000 =   15,000
  • Basis this EMI, total additional loan that may be sactioned at an interest rate of 15% over 5 years =   6,30,000.00
Loan application is likely to get approved

DETERMINATION OF ELIGIBILITY – Case 2

  • Income :   1,00,000
  • Total EMI’s being paid :   50,000
  • EMI to Income Ration : 50% [50,000 / 1,00,000]
  • Rule of thumb EMI to Income Ratio: 50%
  • Total Borrowing Capacity : 50% *    1,00,000 =   50,000
  • Total Incremental EMI that individual can afford :    50,000 –   50,000 =   0
  • Basis this EMI, total additional loan that may be sactioned at an interest rate of 15% over 5 years =   0
Loan application is likely to get rejected

Case 1

  • Income :   50,000
  • Total EMI’s being paid :   10,000
  • EMI to Income Ration : 20% [10,000 / 50,000]
  • Rule of thumb EMI to Income Ratio: 50% [lenders assume you will need half salary for living expenses].
  • Total Borrowing Capacity : 50% *  50,000 =   25,000
  • Total Incremental EMI that individual can afford :  25,000 –   10,000 =   15,000
  • Basis this EMI, total additional loan that may be sactioned at an interest rate of 15% over 5 years =   15,00,000
Loan application is likely to get rejected

 

Case 2
  • Income :   1,00,000
  • Total EMI’s being paid :   50,000
  • EMI to Income Ration : 50% [50,000 / 1,00,000]
  • Rule of thumb EMI to Income Ratio: 50%
  • Total Borrowing Capacity : 50% *
      1,00,000 =   50,000
  • Total Incremental EMI that individual can afford :  50,000 –   50,000 =   0
  • Basis this EMI, total additional loan that may be sactioned at an interest rate of 15% over 5 years =   0
Loan application is likely to get rejected