How Banks Check GST and Non-GST Businesses for Loans

Receiving a business loan is a significant accomplishment for any entrepreneur. It’s not uncommon to find small business owners who think banks lend only to GST-registered. businesses and if one does not have a GST number, you are automatically rejected. This is one of the biggest misconceptions in business finance.

In the real world, banks do not lend to only GST businesses; but also non-GST businesses. The disparity, though, is in how banks assess them, what documents they depend on and how they determine the ability of a person to repay. If you know how this works, it could greatly enhance the likelihood of getting approved for a loan.

In this blog, we explain how banks assess GST and non-GST businesses for loans. what you can do to boost your chances of being approved.

Why Banks Look at Businesses Before Granting Loans

People don’t lend money on the basis of business ideas or promises for the future alone. All they’re mostly interested in is whether or not the borrower will repay them on time, and in full. Banks also look for the financial status, strength and reputation of a business to ensure that lending it money.

The assessment allows banks to gauge how many years and much it has been working, how frequently does it make earnings, the difference between owner’s personal and business finances discipline, and is there enough cash flow flows in each month to cover loan EMIs. This applies to all traders, whether they are registered under GST or not.

How Banks Verify GST-Registered Businesses for Loans

For banks, GST registration offers a structured and transparent information about a business. As GST returns are filed through a government portal, banks regard them as trustworthy information.

The first point banks check is the GST return filing history. Filing the returns on a regular basis and without delay also indicates that business is being carried out by the entity lawfully. Errant filings, late submissions or repeated corrections can call attention to financial mismanagement.

Banks also analyse sales turnover declared in GST returns carefully. They then cross-reference this turnover to the credits in his business bank account. If all goes well, and the GST sales and bank deposits match up – it gives confidence in the business’s claimed income.

Another significant point is the age of GST registration. Those that have a GST history that dates back at least a year are normally deemed to be the safer businesses. More years of GST record may be more beneficial to get qualified for a higher stock loans and quicker sanctioning.

Similarly, banks can consider evaluating the overall GST compliance well-being – tax payments and input tax credit utilization. Clean compliance is reflective of real business and lowers the perceived risk for a creditor.

How Banks Verify Non-GST Businesses for New Loan

Non-GST companies are not being turned away by banks, but their evaluation is more driven by traditional financial parameters. As there is no GST figure, banks rely on other evidences to know customers’ income and stability.

For non-GST businesses, the crucial document is the bank statement. Banks review statement of past few months to learn about cash flow pattern, deposit frequency, average balance and withdrawal behaviour. Frequent money coming in suggests a legit business is being operated.

Income Tax Returns is of great importance for non GST business. Banks verify that returns are filed reliably and if the income claimed is sufficient to qualify for the loan amount described. Continued income for years is credibility.

Banks also do evaluate the type and durability of business. If the business has been serving from one place for many years, then it is perceived to be less risk as compared to the start-up. It uses proofs such as shop licenses, rental agreements or utility bills to verify business continuity.

Banks: To verify income statements, banks could accept additional documentation such as sales receipts, invoices, payment app records or client contracts. These documents would show that business earns on regular basis, even without registration under GST.

Differences For Bank Evaluation – GST And Non-GST Businesses

The main distinction between GST and non-GST traders would be the data, which will be available. Data Points GST businesses give structured, government verified data to banks whereas for non-GST business banks have to collate various documents together to get a complete view.

GST businesses usually will have faster processing and higher eligibility, as their turnover could be verified relatively more easily. Processing may take longer for businesses not registered with GST, but good banking and income history can still get you approved.

Banks are not declining application for the sole reason of being non-GST business. Denials usually occur because of a lack of financial discipline, inability to justify income or poor credit behaviour.

Is GST Registration Mandatory for Loan Approval?

However, if you have obtained registration under GST, it does not mean that you get loan approval. Though it increases transparency, banks still review other responsible criteria such as banking habits, credit score, existing liabilities and repayment capacity.

At the same time, not having GST is not necessarily an impediment to obtaining a loan. There are a lot of small traders, service providers and proprietors not under GST. They are easily getting business loans on the basis of clean financial records.

Commonly Reviewed by Banks for Any Business

GST or not, banks focus on two fundamental elements of every loan application:

• Banking habits such as regular deposits, minimum balance maintenance and efficient cash withdrawals

• Credit profile, including CIBIL score, previous loan repayments and current EMIs

If highly ranked in the aforementioned categories, other deficiencies generally are overlooked.

The Most Common Reasons for Getting Declined on Your Business Loan Application

A significant number of denied loan requests occur because of avoidable errors. Some irregular activity like bank cash deposits, heavy cash withdrawals, sudden increase in deposits, low average balance and non-filing of IT returns are the kind of red flags for banks.

Low credit score, EMI payment defaults and several existing loans also decrease the likelihood of approval. Banks like to see longevity and financial discipline with borrowers.

Loan Eligibility for GST and Non-GST Businesses – How to Enhance it?

Catalyst is not necessary for higher loan eligibility. Little by little, strides can be made. Keeping regular bank transactions, filing returns in time and maintaining proper books of accounts are very important.

GST Businesses: GST turnover matching the credits in the bank and timely return filing will make you more credible. In case of non-GST businesses, disciplined banking and timely ITR filing are the important contributors in developing the confidence of lenders.

Conclusion

GST registration is not the type of thing banks look at to approve a business loan. They qualify loans hoping for clear, consistent repayment ability. GST business captures are weighted towards structured data whereas non-GST tax businesses have a heavier reliance on banking and income records.

Even if your business exhibits good income generation, clear banking behavior and responsible financial management, approval of loans doesn’t require GST on papers at all. Knowing what goes on behind the scenes when you apply for a bank loan makes you more prepared, helps to avoid rejections and gives you that upper hand feel when speaking to lenders.

A business that’s prepared is always more bankable than one that goes in without understanding what they are getting into.

Get Your Questions Answered