Personal loans can be a convenient financial option for small business owners who require quick funds without the need for collateral. However, securing a personal loan depends heavily on meeting specific eligibility criteria, particularly for self-employed individuals. Lenders also assess the applicant’s creditworthiness using a CIBIL score, which plays a crucial role in the approval process. In this blog, we will delve into the eligibility criteria specific to small business owners and explore the importance of a good CIBIL score in getting a personal loan.

Eligibility Criteria Specific to Small Business Owners

Self-Employed Professionals and Non-Professionals

Lenders classify small business owners into two categories: self-employed professionals and self-employed non-professionals. Self-employed professionals are individuals engaged in specialized fields like doctors, chartered accountants, or lawyers. Their professional qualifications and established practices can often work in their favour when applying for a personal loan. Self-employed non-professionals, on the other hand, are individuals running businesses without a professional qualification, such as shop owners or small-scale manufacturers.

Both groups are eligible for personal loans, but their eligibility requirements may differ slightly. Professionals may have an advantage due to their qualifications and steady clientele, while non-professionals may need to provide more financial proof, such as business income and profit consistency, to demonstrate their loan repayment capability.

Years in Business for Personal Loans for Small Businesses

One of the critical factors lenders assess is the longevity of your business. To ensure that your business is stable and can generate revenue, most lenders require that your business has been operational for at least 2-3 years. This track record reassures lenders that your business is well-established and has a consistent cash flow, reducing the risk of default. If your business has been running for less than this period, your chances of approval may decrease, or you might be offered a loan at a higher interest rate.

Annual Turnover Requirement for Personal Loan for Small Business

Annual turnover is another crucial eligibility criterion for small business owners applying for personal loans. Lenders typically look for businesses with a steady and reliable turnover to ensure that the borrower has sufficient income to meet the loan repayment schedule. Demonstrating a consistent annual turnover reflects the stability of your business and increases your chances of securing a loan. While the required turnover amount may vary depending on the lender, businesses with higher turnover are generally more likely to qualify for favourable loan terms.

Profitability and Revenue Consistency

In addition to annual turnover, profitability and revenue consistency are vital metrics that lenders consider. A business that shows regular profits and maintains consistent revenue over a few years is perceived as a low-risk borrower. Lenders are more likely to approve personal loans for businesses that can demonstrate sustainable profit margins and minimal fluctuations in income. A dip in profitability or irregular revenue may raise red flags, making it harder to get loan approval.

Income Tax Return (ITR) Requirement

Most lenders require Income Tax Returns (ITRs) for the past 2-3 years as part of the personal loan application process. Submitting ITRs helps the lender verify your income sources and assess your financial stability. It shows that you are compliant with tax regulations and that your business has been generating revenue consistently. Failing to provide ITRs or having incomplete returns may hinder your loan application, as it creates doubt about your financial standing.

Bank Statements and Their Role in Personal Loans for Small Business

Bank statements are key financial documents that lenders ask for during the loan approval process. Typically, you will need to provide bank statements from the last 6-12 months. These statements allow lenders to assess your cash flow, analyze the deposits and withdrawals, and ensure that your business is financially healthy enough to support loan repayments. Regular deposits, fewer bounced checks, and a good balance at the end of each month can enhance your chances of approval.

Business Registration Documents for Personal Loans for Small Business

Though personal loans do not require collateral, some lenders may ask for business registration documents to verify the legitimacy of your business. Having your business registered under relevant laws, such as GST registration, or being recognized by other government authorities can work in your favour. Providing these documents assures lenders that your business is genuine and established, increasing your loan approval chances.

The Role of CIBIL Score in Getting a Personal Loan for Small Business

Importance of CIBIL Score in Personal Loan for Small Business

A CIBIL score is a numerical representation of your creditworthiness based on your credit history, and it plays a crucial role in determining whether or not your loan application will be approved. Lenders heavily rely on the CIBIL score to gauge the applicant’s past credit behaviour, including timely repayment of loans and credit card dues. For small business owners, a strong CIBIL score not only increases the chances of loan approval but also ensures that you get better interest rates and loan terms.

Minimum CIBIL Score Needed for Personal Loan for Small Business

Most lenders in India require a minimum CIBIL score of 700 to approve a personal loan for small businesses. A score above 700 demonstrates that you have a good repayment history and are less likely to default on the loan. However, if your CIBIL score is below 700, it doesn’t necessarily disqualify you from getting a loan. Lenders may still approve the loan, but it may come with a higher interest rate or stricter repayment terms. Maintaining a high CIBIL score is essential to getting favourable loan terms.

How to Improve Your CIBIL Score for a Personal Loan for Small Business

Improving your CIBIL score is a gradual process, but it can significantly boost your chances of securing a personal loan for your business. Here are a few tips:

• Pay off existing debts: Ensure that you are paying your credit card bills and existing loan EMIs on time.
• Avoid applying for multiple loans: Multiple loan inquiries can negatively impact your credit score.
• Maintain a low credit utilization ratio: Using too much of your available credit limit can hurt your score. Aim to use less than 30% of your credit limit.
• Review your credit report regularly: Check for errors or discrepancies in your credit report and get them corrected to avoid negative impacts on your score. By following these steps, you can improve your credit score over time and increase your chances of getting approved for a personal loan.

Key Factors Affecting Eligibility for Personal Loans for Small Business Owners in India

When applying for a personal loan for your small business, several factors can influence your eligibility. It’s not just about having a steady business or a good credit score; other variables, such as your existing debts, co-applicants, collateral, and lender-specific criteria, also play a critical role in whether your loan application will be approved. In this blog, we will break down the key factors that lenders consider when assessing your loan application and provide insight into the documentation required to prove your eligibility.

Impact of Existing Debts on Personal Loan for Small Business Eligibility

One of the most significant factors that lenders evaluate is your existing debt obligations. If you already have multiple loans or EMIs (Equated Monthly Installments) on other debts, lenders may perceive this as a higher risk and could either reduce the loan amount they are willing to offer or reject the application altogether. This is because your Debt-to-Income (DTI) ratio plays a crucial role in determining your ability to repay the loan. A higher DTI ratio, indicating that a large portion of your income is already being used to pay off debts, can negatively affect your loan eligibility. To improve your chances of approval, it’s advisable to minimize existing liabilities before applying for a personal loan for your business.

Role of Co-Applicant in Personal Loan for Small Business

Adding a co-applicant can enhance your eligibility for a personal loan. A co-applicant, such as a family member or business partner, shares the responsibility for loan repayment, which can make the lender feel more secure about approving your loan. This is particularly helpful if your business is relatively new, your income is inconsistent, or your credit score is lower than desired. A co-applicant with a stable income and a good credit score can increase your loan eligibility, lower interest rates, and even allow you to secure a higher loan amount. However, it’s important to remember that both you and your co-applicant will be equally responsible for the loan repayment.

Collateral Requirements for Personal Loans for Small Business

Although personal loans are generally unsecured loans, which means they do not require collateral, providing collateral can sometimes be beneficial for securing higher loan amounts or better interest rates. Collateral refers to any asset that you pledge as security for the loan, such as property, machinery, or vehicles. Offering collateral reduces the risk for lenders, and in return, they may offer you more favourable loan terms. While collateral is typically not required for personal loans, some lenders may offer a secured personal loan option, especially if the loan amount you need is substantial.

Lender-Specific Criteria

Each lender may have its own set of internal policies and criteria that can influence your eligibility. While most banks and NBFCs (Non-Banking Financial Companies) follow standard guidelines for personal loan approval, certain lender-specific factors such as loan limits, interest rates, and repayment terms can vary. Some lenders may place more emphasis on your business profitability, while others might prioritize your credit score or the industry in which your business operates. It’s essential to research different lenders, understand their specific eligibility criteria, and choose the one that aligns best with your financial needs and situation.

Documentation Required to Prove Eligibility for Personal Loan for Small Business

When applying for a personal loan, providing accurate and comprehensive documentation is critical. Lenders need to verify your identity, income, and business details to assess your eligibility. Below are the key documents you need to submit when applying for a personal loan for small business purposes.

Identity and Address Proof for Personal Loans for Small Businesses

To establish your identity and residential address, lenders typically ask for KYC (Know Your Customer) documents. The most commonly accepted identity and address proofs include:

• Aadhaar Card
• PAN Card
• Passport
• Voter ID Card
• Driving License These documents verify your personal details and ensure that you meet the basic eligibility criteria for a loan, such as being an Indian citizen and within the required age range (21-60 years).

Income Proof for Small Business Owners

As a small business owner, it’s crucial to provide income-related documents to prove your financial stability and your ability to repay the loan. Lenders may ask for:

• Income Tax Returns (ITRs) for the last 2-3 years: These documents help assess the consistency of your income.
• Profit and Loss Statements: These statements reflect your business’s financial performance.
• Audited Financials: Some lenders may require audited reports to verify your business’s financial health. Providing these documents assures the lender that your business generates enough revenue to cover loan repayments, which improves your chances of approval.

Bank Statements

In addition to income proof, lenders will also require your bank statements from the past 6-12 months. These statements provide a clear view of your business’s cash flow, monthly deposits, and withdrawals. A healthy and consistent flow of income into your bank account demonstrates that your business is stable, further boosting your loan eligibility. Additionally, lenders may use bank statements to check for any unpaid loans or other financial liabilities.

Business Proof Documents for Personal Loan for Small Business

To verify the legitimacy and operation of your business, you will need to submit certain business-related documents. Depending on the lender, the required documents may include:

• Business Registration Certificate
• GST Registration
• Trade License
• Partnership Deed (if applicable) These documents act as proof that your business is legally registered and compliant with the necessary regulations. Having up-to-date and accurate business documents can greatly enhance your credibility in the eyes of lenders.

How to Improve Your Eligibility for Personal Loan for Small Business in India

When applying for a personal loan for your small business, improving your eligibility can significantly increase your chances of approval. There are several steps that small business owners can take to enhance their financial profile and make their loan applications more appealing to lenders. In this section, we will discuss practical strategies to improve your eligibility for personal loans, including enhancing your CIBIL score, maintaining consistent income records, reducing debt, and proving business stability.

Improve Your CIBIL Score

A high CIBIL score is one of the key factors lenders consider when evaluating your loan application. Most lenders require a minimum CIBIL score of 700 to qualify for personal loans. If your score is below this threshold, it’s essential to take steps to improve it before applying for a loan. Here are some actionable ways to boost your CIBIL score:

• Timely Repayment of Debts: Always make sure to repay your existing loans and credit card bills on time.
• Avoid Frequent Loan Applications: Submitting multiple loan applications in a short period can negatively affect your credit score.
• Reduce Credit Utilization: Try to keep your credit card utilization under 30% of your credit limit.
• Monitor Credit Report: Regularly check your credit report for errors and discrepancies that may be lowering your score. By improving your credit score, you can boost your loan eligibility and increase your chances of securing better loan terms, such as lower interest rates.

Maintain Consistent Income and Financial Records

Lenders prefer applicants with a steady income and well-maintained financial records, as this demonstrates that the business can generate consistent revenue and repay the loan. It’s crucial to keep the following in mind:

• Regular Income: Maintain steady income inflows by ensuring that your business has a reliable customer base and stable sales.
• Up-to-date Financial Statements: Submit accurate profit-loss statements and audited financials to provide a clear picture of your business’s financial health.
• Timely Income Tax Returns (ITRs): Filing your ITRs on time helps create a transparent record of your business’s earnings, which can enhance your loan application. Having well-maintained and consistent financial records not only improves your loan eligibility but also helps you build trust with lenders.

Reduce Existing Debt Obligations

Your Debt-to-Income (DTI) ratio plays a critical role in determining your loan eligibility. If a large portion of your income is already being used to pay off existing debts, it may reduce the amount you can borrow or result in higher interest rates. To improve your DTI ratio and increase your eligibility:

• Repay Existing Loans: Focus on clearing high-interest debts or reducing outstanding balances on your loans.
• Avoid Taking on New Debt: Postpone any non-essential loans until after you’ve secured the personal loan for your business. A lower DTI ratio assures lenders that you have the financial capacity to take on additional debt and make timely repayments.

Prove Business Stability for Personal Loan for Small Business

Lenders need to see that your business is financially stable and capable of generating consistent revenue. To demonstrate this stability:

• Show Consistent Business Operations: Provide bank statements, ITRs, and profit-loss statements that reflect your business’s continuous operations over time.
• Highlight Profitability: Emphasize consistent profits or a steady upward growth trajectory in your financials.
• Business Longevity: A business that has been operational for at least 2-3 years typically has a better chance of getting loan approval. By proving the stability of your business, you make a strong case for your loan application and improve your chances of securing funds.

Top Banks and NBFCs Offering Personal Loans for Small Businesses in India

India has a wide range of banks and NBFCs (Non-Banking Financial Companies) offering personal loans tailored specifically for small business owners. In this section, we will provide a list of popular lenders, compare interest rates and loan terms, and explain the application process for a personal loan from major institutions.

Popular Lenders for Personal Loans for Small Business

Several banks and NBFCs in India provide personal loans to small business owners, each with its own set of offerings and terms. Below are some of the most popular lenders:

• Kreditbazar: We’ve partnered with leading NBFCs to provide personal loans for low CIBIL score borrowers, offering tailored solutions that meet your needs without adding unnecessary complexity to the process.
• HDFC Bank: Known for quick disbursement and flexible repayment terms.
• ICICI Bank: Offers competitive interest rates and special loan schemes for small business owners.
• Bajaj Finserv: Provides fast loan approval and disbursal with minimal documentation.
• State Bank of India (SBI): Offers personal loans at affordable interest rates, with longer repayment tenure.
• Axis Bank: Offers personal loans with a special focus on self-employed individuals. Choosing the right lender based on your specific needs and business situation is critical to ensuring a smooth loan application process.

Comparison of Interest Rates and Loan Terms

Here’s a brief comparison of interest rates and loan terms offered by various lenders:

• HDFC Bank: Interest rates start from 10.50%; tenure ranges from 1 to 5 years.
• ICICI Bank: Interest rates start from 10.99%; tenure is up to 5 years.
• Bajaj Finserv: Interest rates vary based on customer profile; loan tenure up to 5 years.
• SBI: Interest rates start from 9.60% for personal loans; tenure ranges from 1 to 7 years.
• Axis Bank: Interest rates from 11.00%; tenure up to 5 years. Interest rates and terms can vary based on your credit score, income, and other factors, so it’s important to compare multiple options before applying.

Application Process for Personal Loan for Small Business

The application process for a personal loan for small business purposes is generally straightforward. Here are the typical steps involved:

1. Check Eligibility: Visit the bank’s or NBFC’s website to review the eligibility criteria for personal loans.
2. Submit Application: Fill out the loan application form online or visit the branch.
3. Provide Documentation: Submit the required documents, including identity proof, financial statements, ITRs, and business registration documents.
4. Loan Approval and Disbursal: After verification of your documents and creditworthiness, the lender will approve the loan and disburse the funds to your account. Following these steps can help you streamline the loan application process and secure the funds your business needs.

Conclusion

In summary, applying for a personal loan for your small business in India requires meeting several eligibility criteria, including having a good CIBIL score, a steady income, and maintaining consistent financial records. Additional factors like existing debts, the possibility of adding a co-applicant, and demonstrating business stability also play crucial roles in securing a loan.

At Kreditbazar, we specialize in providing pre-approved personal loans from our trusted lending partners and NBFCs. If you’re a small business owner looking to expand your operations or manage working capital, now is the time to check your eligibility and apply for a personal loan. Visit our website to explore your loan options and take the first step toward securing the funds your business needs for growth and success. Apply Now!