When you are starting or running a business, it is important to be aware of the possibilities that can affect you. When it comes to finance, at some point of time, every business needs a business loan. That is why it is important to be prepared with the right documentation, maintain a good credit score and routinely check your eligibility for business loans.

Business loans are usually easy to apply and get approval for, however there are certain circumstances in which a business is not eligible for a business loan. The circumstances vary from lender to lender, but in general, here is what could affect your eligibility.

Unregistered businesses

If you are running a business informally, then your application will not be considered by banks or finance companies. Your business has to be registered and legally recognized by the law. You must be able to prove the existence of your business with documents. You will a proof of ownership, proof of business in the form of trade licenses, sales tax certificate/returns and income tax returns.

Unaudited accounts

Banks and finance companies do not lend to businesses that have unaudited accounts. It is important to get an audited profit and loss statement along with an audited balance sheet for every financial year.

Negative cash flows

If your business has a history of generating negative cash flows for a long period of time, you will be deemed ineligible by lenders because of the high risk factor.

Insufficient turnover

This is a condition that varies depending on which bank or finance company you go to. Many lenders have a policy that restricts them from lending to businesses with a turnover below 20 lakhs a month. The turnover requirements also vary depending on the size of loan you are looking to apply for. For certain ranges of turnover, you will only be eligible for a certain amount of loan.

Below par credit score

If your business has a poor credit rating because of payment defaults in the past, banks and finance companies can refuse to approve your loans. It is important to maintain a clean and positive credit history

Existing loans

If your business has already taken up loans, especially unsecured loans, banks and finance companies are likely to declare you ineligible for a new loan due to your existing repayment obligations.

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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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