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.