GST Business Loan-Meaning and Purpose
Small scale businesses in India continue to face challenges to manage their financial liquidity. It leads them to resort to short term credit facilities to meet urgent financial needs. But it is not always easy. Processing loans could take a lot of time, need lengthy paperwork and collateral to demonstrate eligibility conditions. Further, businesses need highly efficient operations to manage competition among players in the market. Accordingly, availing a GST business loan could encourage business growth.
A GST business loan is a short-term unsecured credit facility where the lender offers credit facility upon the GST returns of the borrower business. GST return assists lenders to examine business’s financial health reflecting its revenue, sales, and overall business performance.
Typically, GST business loans are availed by small-scale businesses (SMEs) and start-ups functioning across business industries such as manufacturing, trading, and services. Businesses who are compliant with GST regulations along with consistent revenues have higher chances to qualify for these loans.
Features of GST business loan
Although several financial institutions offer GST loans to SMEs, lending terms and conditions of every lender differs from one another. Nevertheless, some of the common features of GST based business loans include-
- No need for collateral- GST business loans are essentially unsecured in nature. In other words, GST loans do not require enterprises to pledge or block assets as security with the lending bank. It helps business owners to have a calm state of mind and helps them to plow back their investments into infrastructural growth. To know more about other loan options you can visit our blog on SME loans
- No income proof required- GST business loans are granted contingent upon the business’s GST return turnover. Borrowers are not required to produce any proof of income or assets i.e. balance sheets, profit and loss statements, current accounts statements or other business-related financial paperwork.
- Faster Loan Processing- Banks approve automated loans relying on the borrower’s revenue from operations (as stated in GST returns) for in-principal eligibility. It facilitates loan approval and distribution far more quickly than with traditional business loans.
- Lending Sums Up to Rs. 1 Cr- The relationship between GST returns and the working capital requirements of a business is closely proportionate. Thus, the borrower entity could avail funds up to Rs. 1crore subject to the GST returns filed by the applicant business entity.
- Flexible Repayment Terms- GST business loans come with a flexible repayment term from 1-3 years as per the cash flow cycle of the borrower business.
Collateral-free Business Loans on your GST Filings
Need for GST Business Loan
The MSME industry in India has been a key beneficiary of GST business loans. Such loans have allowed small enterprises to maintain funds helping them thrive. It can also assist in meeting a number of financial requirements, such as those related to operating capital, infrastructure development, and technological advancement. With most SMEs falling under the GST regime, lenders may readily analyze their repayment capacity and give cash.
Other than this, here are some other purposes of GST based loans-
- Effective Cash Flow Management-GST loans could help businesses to minimize the gap between invoices and payments by assisting businesses to regulate their business cash flows. GST business loans allow speedy access to working capital to meet operational requirements. For example, it might be utilized to employ staff, make vendor payments, procure materials, among other things. Businesses who experience fluctuations in the seasons or operate on a prolonged payment cycle may find it particularly useful.
- Growth and Expansion- GST loans may encourage business expansion through the introduction of new products, financing advertising campaigns, modernizing business equipment and infrastructure, or the setting up of new business units.
- Inventory Management- Businesses can use GST loans to acquire inventory to satisfy consumer demand and prevent stockouts. It is predominantly significant for business entities engaged in production, distribution, and retail business activities.
- Financial Flexibility- Availing a GST business loan could assist businesses deal with poor cash flow, manage unexpected obstacles, or grab growth opportunities. It also assists businesses to sustain operations throughout trying times and adjusting to changing market conditions.
- Compliance with Tax Obligations- The GST Act 2017 stipulates numerous consequences and penalties for entities failing to satisfy compliance deadlines. However, businesses availing a GST based loan could help to improve compliances in an effective manner.
For options other than GST loans available for an SME you may read here.
GST Business Loan Types
Working Capital Loans-
Working capital loans assist business organizations to fulfill their daily operational needs, such as regulating expenses and paying vendors. Lenders may grant working capital through examination of GST returns with fund limit determined as per monthly business turnover. All you need to know about Working Capital Loans is here.
Term Loans-
Term loans are offered for a specified timeframe i.e. 1 to 3 years on the basis of borrower’s GST reports. Such loans could be utilized by businesses to finance long-term requirements like equipment purchases or expansion.
Overdraft Facility on GST –
Certain lenders may offer overdrafts facility to the borrowers on the basis of GST returns. Businesses can use this facility for withdrawing in excess of the available balance in their business accounts, and the total amount borrowed is repaid by future cash inflows.
Invoice Financing-
Businesses can also choose invoice financing, which allows businesses to take out loans secured by outstanding invoices as per the GST filings. It assists businesses in filling cash flow gaps when client payments are delayed.
GST Business Loan Benefits
Loans without Collateral-
Businesses often struggle to access credit due to the need for collateral. A great deal of entrepreneurs either lack assets or have assets assigned to secure other debts. On the other hand, a GST loan makes it simple to apply for a business loan with just necessary paperwork along with a certified copy of GST returns filed. No need to arrange any business assets or pledge personal assets to guarantee repayment.
Quick Disbursal-
GST based business loans offer swift access to business capital. Businesses waiting for weeks for conventional loans processes might harm their business prospects. It might disrupt their production schedule and business operations, or it might result in missed business possibilities.
Minimal Documentation-
GST loans prioritize GST filings over income statements; thus, lenders seek minimal paperwork during the application process. After submitting the GST paperwork and completing the KYC verification, borrower businesses do not need to submit any other business-related documents.
No restriction on usage of funds-
The lender furnishes the loan amount to business owners who request for a GST-based credit, without restrictions on the fund utilization. As long as the loan is used for business-related expenses rather than personal ones, businesses could use the funds for meeting any business- related expenditure.
Access to short term capital-
MSMEs in a variety of industries with seasonal variations require funding during periods of high demand. GST loans make short-term capital more accessible. Moreover, certain lenders offer letter of credit, bank guarantees, and overdraft facilities on GST loans.
Cost-effective compared to other short-term obligations-
Small businesses commonly resort to private financiers or NBFCs to acquire short-term financing at higher interest rates while traditional lenders take longer to execute business loans. However, businesses with strong credit scores could avail GST loans at an interest rate of 8%.
GST Business Loan Drawbacks
Requirement of GST compliance record-
Lenders evaluate documents such as GST compliance records, previous GST tax payments, GST returns, including any unpaid balances. Businesses with a history of GST compliance concerns could face the risk of loan denial or reduced loan amounts despite having sufficient turnover. Again, inadequate compliance results in lower loan amounts or have a detrimental impact on loan eligibility.
GST loans are only short-term loans-
Due to their tendency to address short-term working capital requirements, GST-based loans are not as suitable for long-term investments.
Limited funds access-
Despite benefits like minimal paperwork and faster disbursal, SMEs could only seek limited loan amounts which could restrict business growth.
Possibility of enhanced scrutiny-
Associating loan disbursements with GST returns may draw more attention to a company’s financial documentation and GST compliance, which could cause delays or other issues.
GST Business Loan Eligibility
- Registered and legal entities- Borrowers seeking GST business loan should be a registered legal entity i.e. Sole Proprietorship/Partnership Firm/ LLP/Private/Public Ltd Companies are eligible entities.
- Valid GST registration – Every borrower shall have a valid GST registration. Lenders may disregard borrower entities with history of GST payment disputes or refusal for payment of tax dues.
- Business Age- Lenders often prefer enterprises with a one to three-year operating history.
- Minimum turnover and profitability criteria- Certain lenders may evaluate the profitability of the company, frequently seeking a minimum amount of time for profitable operations (e.g., 1 or 2 years). The minimal business turnover criteria an applicant must satisfy is determined by the loan size.
- Credit history- GST loans are often granted depending on a company’s turnover as declared in its GST reports. However, the borrower’s financial soundness and credit history may have an impact on interest rates.
- No Tax Defaults- There must not have any violations on GST payments by the applicant entity.
- Consistent GST fillings- Lenders often demand businesses to maintain continuous GST filings throughout no less than a year.
GST Business Loan Documents Required
Lenders typically need the following crucial documents from the borrower entities applying for GST based business loan-
- Certified copy of GST registration certificate;
- Past six months bank statements;
- Financial Statements of the business entity (Balance sheets, P &L statement)
- Documents establishing identity of business owner (i.e. Aadhaar card, PAN card, Passport. Driver License, etc.);
- Address proof of the business owner through documents like electricity bills or rent agreement, etc.
- KYC documents of the business owner and directors;
- Copies of Income Tax Returns for at least past three years;
- Proof of business continuation (i.e. Business Registration Certificate, GST registration certificate, Trade license, etc.)
- Additional documents applicable for the business (licenses/certification), etc.
GST Business Loan Application Process
Check the eligibility criteria
Before making a loan application, it would be a good idea to make sure that the applicant entity satisfies the lender’s eligibility criteria including turnover, business age, and GST compliance.
Conduct research on various lenders
GST-based loans are offered by a number of lending institutions (i.e. banks/NBFCs and digital lenders) in India. Undertake in-depth research to seek lenders offering GST business loans for cheaper interest rate and flexible repayment terms. Alternatively, business owners can also register their organization on the official government portal (https://www.psbloansin59minutes.com/home), where several lenders grant low-interest MSME business loans.
Submit application and receive loan approval notification.
The borrower entity will choose the lender offering a GST business loan at favorable terms. After which it shall submit a GST business loan application with all required documentation. Once all the documents are uploaded on the portal an acknowledgement receipt will be generated. If the lender is satisfied with the GST returns filed along with other financial paperwork, it will approve the loan monies will be transferred to the business account.
Key Factors Affecting GST Business Loan Approval
Although GST business loans have far lesser eligibility criteria compared to any other business loans, certain factors might have a bearing on GST loan approval or loan amount, including-
- Failure to fulfill GST compliances- Lenders assess creditworthiness of the applicant business on the basis of GST returns. Hence, businesses who have failed to pay tax dues or filed erroneous GST returns or have failed to submit GST returns within the due period might negatively affect GST loan application.
- Frequent turnover fluctuations- Businesses who have consistently achieved higher sales have higher chances of loan approval. However, business entities facing inconsistent sales might raise concerns about their financial health.
- Credit Score- Though the GST based business loans do not require a high credit score, businesses with higher credit scores might help to negotiate favorable loan terms.
- Repayment Ability- Businesses who already availed multiple business loans, lenders might consider it risky to grant additional credit facilities.
Points to Keep in Mind Before Applying for GST Business Loan
Here are some points to be kept in mind before making an application for GST based loans-
- Check Crucial GST Business Loan Terms and Conditions- Business entities should take a note of factors such as applicable interest rate, processing cost involved, repayment tenure and repayment schedule, etc. by analyzing and comprehending them carefully.
- Ensure GST Compliance- Fulfilling GST compliances within the due period could naturally boost credibility and increase loan approval prospects.
- Pick a Suitable GST Business Loan Provider- Choose a lender with a solid track record, transparent procedures, and adjustable repayment plans designed for MSMEs after doing your research.
- Consider Choices for Repayment – Ensure that you are capable of making on-time repayments and make sure you comprehend the EMI structure and any prepayment fees.
- Have a Well-Defined Business Plan- Make sure you are clear on how the GST business loan money will be utilized to assist the expansion of your organization and produce profits. This is not just mandatory from the banking perspective but also essential for self assessment and correction if teh business deviates from the goals.
Final Thoughts
Though many Indian financial institutions provide business loans, many companies still struggle to get approved for a loan for a variety of reasons, including a lack of collateral and inadequate documentation. For SMEs and MSMEs, business loans on GST returns are a simple and dependable way to access funds required to sustain operations or grow their enterprises. Thus, SMEs in India have been the biggest beneficiaries of GST business loans.
Such loans are subject to the same eligibility, usage, and repayment requirements as other loans. However, since these loans are granted against GST returns, the documentation is simple with a faster approval process which democratizes credit access for the SME sector in India. To help manage you loans better contact experts like BankKeeping who can help with compliances and also bring down the borrowing costs.
FAQs
Who can apply for a GST business loan?
Any registered business like proprietary or partnership firm, limited companies or LLPs can apply for the GST business loan provided they have a GST registration and a regular GST filing history.
Can a start-up apply for a GST business loan?
Yes they can but, since a start up business may not have a regular GST filing history, it may have to wait at least 1 year before applying for the loan.
How much loan can be granted under the GST business loan scheme?
Up to 1 cr may be granted under this scheme but it depends on the turnover, consistency and credibility of the borrowing business.