GST Business Loan: Benefits, Eligibility, and Application Process

Many small businesses perennially feel hard-pressed when it comes to managing financial liquidity. So, they resort to short-term loans whenever payments get delayed or unforeseen expenses arise. However, processing conventional business loans takes time. Lenders require collaterals or submitting tax returns to prove a stable flow of income. GST business loans solve many of these problems.

This article discusses business loans against GST returns, their features and benefits, application procedures, etc. 

What is a GST Business Loan?

After the government's introduction of the Goods and Services Tax (GST) in 2017, banks launched a new type of short-term loan product for micro, small, and medium enterprises (MSMEs) to finance their working capital requirements. These are primarily term loans, processed based on turnover reported in GST returns. This is the reason such loans are commonly known as GST business loans. The minimum loan amount under the GST loan scheme can be as low as ₹1 lakh, and the maximum value can be up to ₹3 crore (varies with banks).  

Features & Benefits of GST Business Loan

Many banks are offering GST loans to MSMEs, and features may vary from one lender to another. However, the standard characteristics of these short-term loans are:

• Income proof is not required for eligibility: A GST business loan is approved based on the turnover filed by a company in its GST returns. Borrowers do not need to submit proof of income and assets, such as balance sheets, P&L statements, current account statements, or other company-related financial documents.   
• Collateral-free (unsecured) loan: These business loans are wholly unsecured and, hence, collateral-free. So, a company taking GST loans is not required to mortgage or block any asset with the lending bank as collateral. 
• Contactless quick loan processing: Banks approve such loans instantly based on the borrower's business turnover (as mentioned in its GST returns) as in-principle eligibility. This makes loan processing and disbursement much faster than conventional business loans.  
• Simplified documentation: When applying for GST loans, borrowers need to submit only basic business-specific documents, like PAN, trade license, and proof of address, in addition to the GST registration certificate. 

These features make GST business loans uniquely beneficial for micro and small businesses. Some of the benefits of a GST loan are:

• Easy access to short-term capital: Most MSMEs are in seasonal businesses. Managing cash flow and working capital needs during peak seasons can be major concerns for these companies. Lack of ready access to working capital can cause lost business opportunities and significant financial losses. GST loans have made it easier for small companies to raise short-term capital. Besides, many banks offer overdrafts, bank guarantees, and letter of credit facilities on GST loans. 
• Zero restriction on fund utilisation: As an unsecured loan, lending banks cannot restrict the end uses of the loaned amount. So, borrowers can use the fund for any business purpose they feel suitable as long as repayment is on schedule. For example, a company can use a GST loan to finance working capital, renovate business premises, pay tax demand, or do anything related to its business.  
• Faster disbursal for urgent capital needs: Most banks take 2 to 3 days to process and disburse GST loans. So, companies that urgently need funds can rely on GST business loans.  
• Low cost compared to other short-term debts: As banks take time to process conventional business loans, MSMEs often resort to private financiers and Non-banking Financial Corporations to raise short-term capital, even at higher interest rates. Borrowers with good credit scores can expect GST business loans at a rate as low as 8%.    

Eligibility Criteria for GST Business Loan

GST business loans are available to Sole Proprietorship Firms, Partnership Firms, Private Limited Companies and Public Limited Companies. The primary eligibility criteria are:

• Registered and legal entities- Only registered entities can apply for this loan. 
• Valid GST registration - Appropriate GST registration and on-time filing of GST returns are also necessary. Banks may disqualify companies undergoing GST disputes or for non-payment of tax dues.  
• A minimum of 3 years of operational history—Most banks require applicants to have continuous business operations for at least three consecutive years. 
• Minimum turnover criteria—The loan size determines the minimum threshold in business turnover that an applicant must meet. 
• Credit history—GST loans are primarily approved based on business turnover, as mentioned in a company's GST returns. However, interest costs may vary depending on the borrower's credit history and financial stability. Companies with zero credit history or poor track records may attract a rate of interest as high as 25% per annum.  

Documents required for GST Business Loan

An applicant for GST loans must submit the following documents along with the loan application:

• Personal KYC - PAN 
• Residential proof - any one of the Rent Agreement, driving license, voter's ID, ration card, Passport or UIDAI card
• Banking continuity - Current account statement of last 6 months 
• Business KYC - GST registration certificate along with trade license and business PAN card  
• GST returns - GST returns of at least the last 6 months

Note: The above list is not exhaustive, the requirements may vary depending on the bank with which the applicant apply the loan.

How is the Loan Amount Calculated? 

Banks treat GST loans as unsecured business loans. So, a borrower's credit score, business performance, and financial propriety play crucial roles in calculating the maximum loan amount and the rate of interest charged. To estimate a borrower's business performance, banks use GST returns of at least six months as references. 

Banks may use different methods to determine credit scores and financial propriety, such as past financial transactions, repayment history, and tax default records.  

Types of GST Business Loans

Unsecured business loans based on GST returns can be of different types, including:

• Working capital loan
• Overdraft 
• Letter of credit 
• Bank guarantee 

GST Business Loan Application Process

Most commercial banks follow a standardised application process for GST-based business loans. A borrower must fill out and submit a loan application form with the necessary documents. Many banks also allow online applications and document uploads in soft formats for entirely contactless loan processing. 

Interest Rates and Loan Tenure

Interest rates on GST business loans can vary from 8% to 26% based on the amount of the loan, the creditworthiness of the borrower, and the borrower's financial transaction history with the respective bank. The maximum loan tenure can be 36 months. 

Challenges and Considerations

GST-based business loans benefit micro and small businesses with limited financial liquidity and business assets. Linking a business loan to GST returns may create new problems for these companies. Banks, while processing such loans, retrieve an applicant's GST data, including information on ongoing compliance proceedings and past cases. Any history of late GST payments, tax demand notices, late returns filing, or other compliance proceedings can negatively impact the loan worthiness of many MSMEs despite their sufficient turnover and repayment capacity.  

So, companies looking for GST loans should be cautious about GST compliance and resolving past compliance issues to avoid poor creditworthiness scores. 

Tips for Successful Loan Application

Any company planning to secure GST loans should follow a few steps to obtain such loans at better terms. 

• Resolve existing GST compliance issues. 
• File GST returns timely and avoid late tax payments. 
• Maintain GST registration and other business documents carefully. 
• Compare loan rates with multiple banks. 
• Maintain healthy financial relations with banks.