As the Indian economy grows after COVID-19, Micro, Small & Medium Enterprises (MSMEs) are looking to expand their operations and recover lost ground. However, most MSMEs face significant hurdles when it comes to securing funding for their businesses. Even though there are several banks and non-banking financial companies (NBFCs) that offer business loans, the rejection rates for these loans remain high.
In most cases, the reasons for loan rejection are due to a lack of understanding of the application process, incomplete or inaccurate documentation and low credit scores.
Therefore, it is important to know the documents required for business loans and have them ready before applying. By making a business loan documents checklist, we can avoid common mistakes in loan applications and prevent business loan rejection. In this blog post, we will discuss the six documents that can prevent business loan rejection.
Shriram Finance, one of the leading NBFCs in India, provides business loans to help MSMEs overcome financial challenges. With attractive interest rates starting at 15%* p.a., Shriram Finance Business Loans are designed to meet the needs of MSMEs across various industries. Apply now for a business loan!
- Availing a business loan can be an excellent way to take your business to the next level, but the loan application process requires careful planning and documentation to prevent business loan rejection.
- Six essential documents, including a Business plan, Financial and Bank statements, Tax returns, Business registration documents, Collateral documents and KYC documents are required to increase the chances of getting your business loan approved.
- It is crucial to ensure that all the documents are accurate and up to date before submitting them to the lender.
- Having a good credit score, adequate collateral and a steady income can also increase the chances of loan approval.
Here are the six essential documents required that can prevent business loan rejection:
1. Business Plan
A business plan is a detailed document that outlines our business goals, strategies and financial projections. It is an essential document that demonstrates to the lender that we have a clear understanding of our business and its potential for success. A business plan should include details such as the type of business, products or services offered, target market, competition analysis, marketing plan, financial projections and management structure. It should also include a repayment plan for the loan, including how we plan to use the funds, the loan amount required and repayment terms. A good business plan can convince lenders that we are low-risk borrowers and increase the chances of getting a loan
2. Financial Statements and Bank Statements
A financial statement is an essential document that provides an overview of a business's financial health. It includes a balance sheet, income statement and cash flow statement. These documents help the lender assess a business's profitability, liquidity and solvency. Financial statements should be up-to-date, accurate and prepared by a certified accountant. It is also essential to provide financial statements for the last three years to demonstrate the business's financial stability.
Bank statements are another important document that lenders require to evaluate a loan application. They show a company's cash inflows and outflows over a specific period of time. Lenders use this information to determine a company's liquidity, cash reserves and creditworthiness.
The following documents are necessary:
- Bank statements for the last six months
- Balance sheet and profit and loss statement for the last three years
- Income tax returns for the last three years
- Audit reports for the last three years (if applicable)
Submitting these documents helps the lender evaluate the borrower's repayment capacity and financial health.
3. Tax Returns
A business's tax returns are another essential document required by lenders to assess a company's financial performance. Tax returns provide an overview of a business's income, expenses and tax liabilities. It helps the lender assess a business's ability to generate revenue and meet its financial obligations. It is essential to have tax returns for at least last three years ready before applying for a loan.
4. Business Registration Documents
Business registration documents are required to verify a company's legal status. These documents demonstrate to the lender that a business operates legally and is compliant with all applicable regulations.
The following documents are necessary:
- Certificate of Incorporation
- Memorandum of Association
- Articles of Association
- GST registration certificate
- Trade licence
- MSME/ Udyog Aadhar registration
5. Collateral Documents
Collateral is an asset that a borrower pledges as security for a loan. It can be in the form of real estate, equipment, inventory or accounts receivable. If the business has collateral to offer, the business owner will have to provide documentation such as property deeds, title certificates or invoices. Providing collateral documents can increase the chances of loan approval as it reduces the lender's risk. The following documents are necessary:
- Property documents (title deed, sale deed, etc.)
- NOC from the municipality or any other authority
- Valuation certificate from a certified valuer
The lender may require additional documents, depending on the type of collateral.
6. KYC Documents
KYC (Know Your Customer) documents are crucial to the loan application process, as they provide information about the borrower's identity and address. The following KYC documents are necessary:
- Aadhar card
- PAN card
- Voter ID
- Driving license
These documents are required to verify the borrower's identity. Providing these documents helps the lender assess the borrower's credibility and reduces the risk of fraud. Submitting any two of the above documents is usually sufficient. However, it is best to check with the lender to know their specific requirements. The lender may ask for additional documents depending on the borrower's business type and loan amount. These may include supplier agreements, customer contracts, purchase orders, export-import licenses, partnership deeds or a memorandum of association.
Tips on How to Prepare for the Loan Application Process
Before applying for a business loan, it is essential to prepare the necessary documents to avoid any last-minute rush. Here are some tips on how to prepare for the loan application process:
Keep all the necessary documents ready and ensure that they are up-to-date.
- Make a business loan documents checklist of all the documents required and check them off as you gather them.
- Ensure that the financial documents are audited and up-to-date.
- Get the business plan reviewed by a professional to ensure that it is comprehensive and covers all aspects of the business.
- Ensure that the collateral documents are in order and legally sound.
- Keep a copy of all the documents for future reference.
Availing of a business loan can be a great way to meet our business needs and take our venture to the next level. However, the loan application process can be tricky and requires careful planning and documentation. The six documents discussed in this article are essential to increase your chances of getting business loan approved. At Shriram Finance, we offer attractive interest rates starting at 15%* p.a., making it a suitable option for business owners in need of working capital or financing for new equipment, raw materials or inventory.
Use our EMI calculator to get an estimate of your loan repayments andapply now for a business loanwith Shriram Finance for quick and easy disbursals with minimal documentation.
1. What are the eligibility criteria for a business loan from Shriram Finance?
The eligibility criteria for a business loan from Shriram Finance may vary and it is always recommended to check with the specific institution for the most up-to-date information. However, generally, common eligibility criteria for a business loan from Shriram Finance includes:
- Age:21 years or older
- Business Vintage: 3 years of business existence
- Documentation: The applicant needs to provide relevant documents such as proof of identity, address, income, business registration, bank statements, tax returns, and other documents as specified by the lender.
2. How long does it take to get a business loan from Shriram Finance?
At Shriram Finance, we strive to sanction the loan with a turnaround time of 3working days. However, it varies based on several factors, including the type of loan chosen, the amount of funding needed, etc.
3. What is the maximum amount of funding I can get with a Shriram Finance Business Loan?
The amount of money you can get from a business loan depends on factors such as your credit score, revenue and business plan. Shriram Finance provides business loans up to ₹30 lakhs, but the exact amount will depend on your specific circumstances, like business stability and credit score.
4. How do I increase my chances of getting approved for an MSME business loan?
To increase your chances of getting approved for a business loan, you should have a sound business plan, a good credit score and a clear understanding of your financials. Additionally, it is crucial to choose the right lender who has experience working with small and medium-sized businesses and understands their unique challenges.
5. What is the minimum credit score required to qualify for a business loan in India?
The minimum credit score required to qualify for a business loan in India varies from lender to lender. However, most lenders require a credit score of at least 700 or higher. It's important to note that a higher credit score can improve our chances of getting approved for a loan and may also lead to more favourable loan terms.