There are a few important factors to be take into consideration while applying for a Business Loan. One of those is Goods and Services Tax (GST) in India. Sometimes it becomes a little challenging to manage all these at a time. In that case, you might require assistance to understand the complexities of taxation and getting a credit smoothly.
This guide zeroes in on the core challenges and solutions for securing a GST business loan in an environment where GST compliance adds an extra layer of complexity. It’s tailored for those seeking to streamline their loan acquisition process, cutting through the GST maze.
Understanding GST and Its Impact on Business Loans
Purpose of GST
GST aims to create a unified tax system, eliminating cascading effects and ensuring tax credits flow smoothly across the supply chain. With GST, businesses are required to register, file regular returns, and comply with the tax regulations set by the government.
The Direct Impact of GST on Business Finance
GST has a significant impact on a company’s financial health and its eligibility for a business loan. Firstly, the compliance becomes crucial for loan eligibility as financial institutions often consider GST registration and regular filing prerequisites for lending. So, businesses that are not registered may face challenges in securing a business loan without GST.
Furthermore, it affects a company’s financials through input tax credits. Under GST, businesses can claim tax credits for the GST paid on purchasing goods and services used in their operations. This reduces the tax burden on businesses and improves their cash flow. Financial institutions consider a company’s input tax credit claims while evaluating their financial health and repayment capacity, ultimately impacting their loan eligibility.
Preparing Your Business for Loan Application
When applying for a business loan without GST, ensure that your financial statements are accurate, comprehensive, and audited. Financial institutions rely heavily on these statements to assess your business’s financial health and creditworthiness.
Here are some pointers on auditing financial statements for loan applications:
1. Hire a professional auditor: Engage a qualified auditor who thoroughly examines your financial records and statements. Their expertise will ensure that your financial statements comply with the required accounting standards and provide an accurate snapshot of your business’s financial position.
2. Review your revenue and expenses: Auditing financial statements involves analysing your revenue sources, expense categories, and profit margins. Ensure that all income and expenses are properly recorded and categorised to clearly show your business’s cash flow and profitability.
3. Verify assets and liabilities: A thorough audit should include verifying your business’s assets and liabilities. This includes checking the accuracy of your inventory, accounts receivable, accounts payable, loans, and other financial obligations. Accurate reporting of these figures will demonstrate your business’s ability to manage its financial obligations.
4. Assess financial ratios: Evaluate key financial ratios such as liquidity, profitability, and solvency ratios. These ratios provide insights into your business’s ability to meet its short-term and long-term financial obligations, profitability, and overall financial stability.
By conducting a comprehensive audit of your financial statements, you can present a clear and accurate financial picture of your business to lenders, increasing your chances of securing a business loan without GST.
Eligibility Criteria for Business Loans in a GST Regime
Standard Eligibility Criteria:
These criteria are not specific to the GST regime but are important factors in determining loan approval:
1. Credit Score: A good credit score is crucial for loan approval. Financial institutions assess your creditworthiness based on your credit history, repayment track record, and outstanding debts. Maintaining a healthy credit score demonstrates your ability to repay the loan.
2. Business Performance: Lenders evaluate your business’s financial stability and performance. They look at annual revenues, profitability, and cash flow. A consistent track record of positive financial performance increases your chances of securing a business loan.
Additional GST-related Criteria:
In a GST regime, lenders may also consider specific Goods and Services Tax criteria. These additional criteria are important for businesses operating under the GST framework:
1. GST Registration: Being registered under GST is often a requirement for loan eligibility. Lenders may verify your GST registration status and the validity of your GSTIN (Goods and Services Tax Identification Number).
2. GST Compliance: Financial institutions assess your compliance with GST regulations. This includes timely filing of returns, payment of taxes, and adherence to guidelines. Non-compliance may raise concerns about your business’s financial discipline and impact loan approval.
3. GST Turnover: Lenders analyse your GST turnover to evaluate your business’s scale and growth potential. A higher turnover indicates a thriving business, which may influence loan approval.
How do GST returns influence your loan approval chances?
Analysing GST returns in the credit assessment process can greatly influence your chances of loan approval. Lenders often review returns to gain insights into your business’s financial health, tax compliance, and revenue patterns.
Ensuring regular and accurate filing of GST returns demonstrates your commitment to transparency and good financial management. This can positively impact your loan application by instilling confidence in lenders regarding your ability to repay the borrowed amount. Furthermore, maintaining GST compliance can lead to better loan terms, such as lower interest rates or loan amounts.
Lenders may view GST-compliant businesses as less risky and more likely to meet financial obligations. Therefore, leveraging GST compliance can be advantageous when seeking a business loan without GST hassles.
Choosing the Right Lender: Banks vs. NBFCs
In this regard, it’s important to consider the differences between banks and Non-Banking Financial Companies (NBFCs). Banks, being regulated financial institutions, offer stability and a wide range of financial products. They generally have stringent eligibility criteria and may require extensive documentation.
On the other hand, NBFCs may have more flexible lending criteria and faster loan processing times. However, evaluating the reputation, interest rates, fees, and customer service of both types of lenders is essential. Additionally, the influence of GST should not be overlooked.
Final Word
Securing a business loan without GST is not a smart idea. However, it can be managed easily by following the steps outlined in this guide. Businesses can confidently navigate the loan application process and secure the funding they need to grow and thrive.
