Understand Unsecured Business Loan Eligibility Criteria for SME


Small and medium enterprises are the cornerstone of India’s economy employing a vast proportion of citizens. In a densely populated and growing country like India, the importance of SMEs is immense and visible. They represent the main catalyst for economic development while also forming the backbone of social-economic development.

Cropping in various, heterogeneous, flexible, dynamic, and adaptable reality, the needs of these small and medium-sized enterprises are in a very similar way dissimilar.

Categorizing or generalizing the financial necessities of a market is a mainstay of a country’s economic development is as reprehensible as it can get.

This unanimously recognized market note worthily has its own individuality, representing its own powers, uniqueness and, yet interdependent in some way or the other. And yet, often in the present day’s sky rising prices, is found to require external financial support.

With the evolution of SMEs came the evolution of banking systems. Harking back to the old days, one can easily make out the changes and growth in the financial spectrum and what is being provided today. This is more evident in the lending sector. Loans are curated explicitly to be customized: loan amounts, interest rates depend largely on a credit score-based system that brings balance, repayment tenures are made flexible and all of this utterly satisfies the diversities of this business world.

Diving in a bit more in the lending sector, loans can primarily be divided into two types:

  • Secured loans – Uses collateral to provide security to the lender. These are usually protected with an asset, mortgages, HELOC, etc. This is, in simpler terms, if the borrower fails to repay the loan, the lender shall have the resources to forfeit the collateral to pay off the loan. Naturally, the interest rates of these loans are, when compared to other varieties, considerably low. Nowadays, usage of these loans is found mainly when the loan amount is of significant value because of its cost-effectiveness.
  • Unsecured loans – These loans are the exact opposite of the former type. Due to the absence of collaterals, lenders providing unsecured loans are fundamentally at risk till the loan is paid off. Naturally, the interest rates in unsecured loans are higher and often seen with less repayment tenure.

However, it needs to be kept in mind that lenders, financial institutions, banks, and NBFCs offering each loan is like chalk and cheese, that is, they are as inconsistent as the necessities. Finalizing a loan that suits one’s best purpose and is both cost-effective and hassle-free is a long process of thoroughly shortlisting through terms and conditions.

What are Unsecured business loans?

As mentioned earlier, unsecured business loans are simply loaning without any collateral. These loans best suit the needs of entrepreneurs, start-ups, small to medium scale business transactions. The security in these loans is the judgement of the lenders while providing a loan to the borrower.

There is a general saying that goes like a borrower of unsecured loans are judged by the five C’s of credit –

  • Character
  • Capital
  • Capacity
  • Collateral
  • Conditions

Based on these yardsticks, a lender judges the credit risk of lending an unsecured loan. Note that these are said methods to evaluate the creditworthiness of a potential borrower and are mere terms used in the financial spectrum.

SME Loan Eligibility Criteria

There is an array of eligibility criteria that one needs to put on their checklist before applying for an unsecured business loan. One mention-worthy task before beginning the list is to maintain a clear and if possible, excellent credit score. Credit scores are the basic factor that is checked in all and every loan and based on this application process and interest rates are influenced.
As the name suggests, unsecured loans to have their own assurances with some set qualifications for the borrower to get accepted and credited.  Every loan has its own demands which vary from each other. Here is a generalized list of the elements to be considered in SME loan eligibility criteria:

  • Age – Unsecured business loans for SMEs are restricted to an age limit ranging from 21 years to 55 or 60 years. This varies from lender to lender where 60 is the maximum limit.
  • Business age – Also known as the vintage criteria is a basic requirement where if the established business vintage or maturity is of one to three years. If the business has experience and good signs of profit, then the chances of interest rates may get lowered depending on the discretion of the lenders.
  • Business Stability – In an unsecured business the lender calculates and considers the probabilities of repayment where factors like stability, experience, and profitability plays a major role. Having a stable business operating from the same location for the last 1 year is a necessity to be credible for an unsecured business loan.
  • Business Turnover A business gets sanctioned for an unsecured business loan only when it has acquired a minimum turnover of Rs. 24,00,000. In some cases, a minimum turnover of Rs 90,000 in the preceding three months of the loan application is also held accountable for.
  • Profitability – Business profitability plays a crucial part for the lender in deciding to sanction a loan. Unsecured loans are not the choice to revive a dead business but for the steady growth or expansion of a business. No lender will stake providing loan to a place where chances repayment are low to nil.

A business is eligible for an SME loan only when it has proven itself to be profitable in the preceding one to three years.

  • Credit and CIBIL score – Acquiring a decent credit or CIBIL score of 650 or above is mandatory for being eligible for an Unsecured SME loan. Having scores above 700 rises the chance of getting loans from any desired lenders.
  • Income Tax Refunds – Unsecured business loans get sanctioned if and only when the business files the ITR in the previous financial year.

All the balance and accounting sheets, profits and turnovers are to be audited and signed by a registered chartered accountant to make them eligible for an unsecured business loan.

  • Eligibility criteria for the Applicant
    • The applicant should be the owner of the business.
    • If it’s a partnership or proprietorship, all the owners might need to apply jointly.
    • The applicant should be a resident of India with no criminal records.
    • Applicant should acquire a minimum of two years of substantial business expertise in the same field in which the loan is applied.
    • Applicant should show signs that he/she is/has been investing their own time and money in the business for a good impression on the lenders.

Things to keep in mind while opting for an unsecure business loan for SMEs.

SMEs are small and medium enterprises which include retailers, wholesalers, service providers, manufacturers, traders, and companies of such genre. And SME loans are provided exclusively to the organizations of this genre. No trusts, NGOs, charitable organizations, or institutions are eligible for SME loans, and this applies on both secured and unsecured loans.

The business must not be blacklisted under the excluded list of the SBA (Small Business Administration) Finance. And lastly, the physical business/enterprise location should not fall in the negative locations list.

With the availability of SME loans online, application is just a moment’s task now. Clearing all the eligibility criteria, one can just start comparing, short listing, and finalizing their desired loans and applying to them via both online and offline process from the lender’s official websites.

A wise businessperson knows the bitter truth of a loan, that is, a loan is meant to be repaid. Therefore, one must always understand the necessity that urges the requirement of a loan. One must not handle the concept light-mindedly. It’s a responsibility that influences all future transactions and manhandling one instance can cause grieve consequences for the rest of the financial transactions with lenders and financial institutions.

Unsecured loans are in plain sight risks for lenders but are boons for the borrowers. However, among all the dazzling beneficiary factors of the unsecured loans, one must not forget to go thoroughly through the company and loan policies and terms and conditions.

Eligibility is the only hurdle in the game, once clearing that, the further processes become duck soup. The best loan is the one which is most cost-effective without any loophole.