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Does Company Type Affect Your SME Business Loan Eligibility?

Published on May 29, 2024Updated on Jun 3, 2024

Does Company Type Affect Your SME Business Loan Eligibility?

A Small and Medium-sized enterprise (SME) or Micro, Small, and Medium enterprise (MSME) business loan is designed for the funding needs of businesses within this segment. These loans provide essential capital for various purposes, such as expansion, managing cash flows during periods of slow activity, purchasing equipment, inventory management, and hiring additional workforce.

Meeting the MSME loan eligibility criteria is the first step in securing the loan. In this article, we will see the different factors that affect MSME business loan eligibility, including the type of company. We will also cover the general steps involved in applying for an MSME loan.  

Importance of business loans for SMEs

Business loans offer SMEs access to growth opportunities that might otherwise be difficult to access. Depending on applicant eligibility, these loans often come with a straightforward and quick application process, competitive interest rates, and flexible repayment tenure. These advantages make business loans an ideal choice for SMEs needing fast access to funds and seeking manageable repayment terms. Additionally, some business loans come with tax benefits, providing opportunities for business expansion using the saved money. 

How do different company types impact SME loan eligibility?

SME/MSME loan eligibility may differ according to the company type. Let's have a look:

Sole proprietorship

In a sole proprietorship, where one individual owns and manages the business entirely, the owner's personal credit score is a key factor as they often offer a personal guarantee. Since the proprietor is accountable for settling all debts, their financial status and credit score could influence their eligibility for business loans.

Partnerships

Partnerships have shared responsibilities, which can potentially be more favourable in the eyes of lenders. The combined creditworthiness of the partners may be considered for loan eligibility.

However, lenders may be concerned about potential disputes between partners. Personal liability is also a concern as each partner is personally responsible for the business's debts.

Private and public limited companies

These enterprises generally have separate legal identities and credit profiles from their owners. The personal credit score of the owner typically holds less weight. However, lenders may require detailed documentation of the business's financial health and potentially personal guarantees from directors or major shareholders, especially for smaller or newer companies.

Factors affecting SME loan eligibility

Let us see some of the important factors that can affect SME/MSME loan eligibility in addition to the company type:

Business age: Lenders usually prefer established businesses and usually require 3 years of business operation.  

Profitability: Profitable businesses are viewed more favourably as they demonstrate the capacity to generate revenue and repay the loan. This aspect can pose a challenge for startups, which typically prioritise growth over income. 

Credit score: A strong credit score, whether personal (for sole proprietorships/partnerships) or business credit score (for companies), indicates responsible borrowing and financial management. A score of 750 or above is generally preferred.

Debt-to-income ratio: This ratio shows how much debt your business has compared to its income. A lower ratio (30% or below) indicates better financial stability and a higher chance of loan approval.

Collateral: Offering collateral, i.e., an asset such as a property, can strengthen your application especially if you are aiming for larger loan amounts.

Impact of company type on loan eligibility

In addition to the company functioning as a sole proprietorship, partnership, or limited company, the following factors are taken into account for MSME loan eligibility:

Lenders typically prefer businesses that are legally registered with the government. This provides transparency and reduces risk for the lender.

A business with an established track record in a stable industry may be viewed more favourably than a startup in a risky industry. This is because the latter can be considered to be more likely for a loan default.

However, it is important to note that every lender has their own MSME loan eligibility criteria. Other factors such as credit history, profitability, the loan amount and purpose, and the presence of collateral will also be considered.

How to apply for an MSME loan?

Here is the general process you can expect when you apply for an MSME loan:

Research

Assess the financial needs of your business and determine the amount of loan required. Once that is in place, research different lenders offering MSME loans. Compare interest rates, processing fees, and eligibility criteria to determine the best option for your needs.

Check your eligibility

Make sure that your business meets the lender's eligibility requirements to increase your chances of loan approval with lower interest rates and flexible repayment options. These could include business age, applicant age, minimum turnover/profit, and so on.

Required documents

Prepare all necessary documents required for the loan application process. This may include business registration documents, financial statements, tax returns, and any other relevant document requested by the lender.

Apply and wait for approval

Fill out the application form carefully and submit the required documents. The lender will assess your application based on eligibility criteria and creditworthiness. Upon approval, the loan amount will be disbursed to your account.

Conclusion

SME business loans, designed for small and medium-sized enterprises, can greatly aid business growth and expansion. Understanding the factors influencing loan eligibility, such as company type, profitability, and credit score, can help you prepare a stronger loan application.

Looking to launch or expand your business? SMFG India Credit provides loans of up to INR 75 lakhs* to eligible SMEs and MSMEs at competitive interest rates, without any collateral. Our business loan eligibility calculator can give you an estimate of the amount you may be able to borrow. Apply online or contact us to know more.

* Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG India Credit. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG India Credit's policy at the time of loan application. If you wish to know more about our products and services, please contact us

FAQs

What types of business loans are available for SMEs?

SMEs can access various types of loans, including term loans, working capital loans, SME loans secured by real estate, equipment loans, and MSME loans.

How does the company structure impact loan eligibility?

Factors based on company structure like personal liability, credit history, and documentation requirements can affect MSME loan eligibility. Sole proprietorships can focus on the owner's personal credit score, partnerships can consider combined creditworthiness, while limited companies may offer reduced personal liability but may need detailed business documentation and director guarantees.

Can sole proprietorships qualify for SME loans?

Yes, sole proprietors can qualify for SME loans as long as they meet the eligibility criteria set by the lending institution.

What documents are typically required for loan applications?

The basic documents required for a business loan include:

  • Identity proof for both the company and the applicant
  • Address proof such as Voter ID or Aadhaar card
  • Account statements for the last 6 months
  • Income documents for the last 2 years
  • Proof of continuation such as ITR or Trade License
  • Other relevant documents such as sole proprietorship declaration or partnership deed

Additional documents may be required based on your profile and the lender’s policy at the time of loan application.

How can a business improve its loan eligibility?

To improve loan eligibility, businesses should focus on maintaining a strong credit score, increasing revenue and profitability, and building a solid business history. Additionally, preparing a solid plan on how you plan to use the loan funds and repay the same can boost your application.

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