One of the latent benefits businesses derive from GST Registration is access to credit. While possessing a GST Registration Certificate directly adds credibility to a business, opening up channels of formal credit, one may not have imagined that mere compliance with the GST regime would make them eligible to get business loans.
The facility mentioned above is called a GST Business Loan, or a GST-based Loan in financial parlance.
Let us understand what GST Business Loans are, the benefits of GST loans, their key features, and the documents required for GST-based Business Loans.
GST Business Loan: Meaning
A GST Business loan, or a GST-based Loan is a working capital loan availed by businesses against their GST returns. They are part of the GST Surrogate Program.
GST business loans can either be secured or collateral-free.
The tenure of the loan depends upon the type of loan facility provided and the policies of the lenders.
In the case of a term loan, GST Business Loans can have a tenure of up to 36 months.
Benefits of a GST Business Loan
There are various benefits of GST benefits of a GST Business Loan based upon the type of loan facilities provided by the lenders, some of which include:
Minimal Documentation
Since lenders usually look at the GST returns of companies for provided loan facilities under the GST surrogate program, the additional documents required are comparatively less than other loan products offered by the lenders.
Quick Disbursement
GST Business Loans offer the benefit of quick disbursement. The GST returns of a business are primarily used to reckon the past track record of the sales of the business and determine their repaying capacity. If the required documents are in place, the disbursement of the loan amount under GST loans is quick.
Collateral-free
Several lenders offer collateral-free GST business loans that are beneficial for companies that may not have idle assets for hypothecation. Lenders can use the GST returns of businesses for assessment of the past track record of sales of the firm and project future revenue based upon the business profile to determine whether they would have the capacity to repay the loan.
How a GST Business loan can help MSMEs
There are several features of a GST Business Loan that make it especially attractive to Micro, Small, and Medium Enterprises (MSMEs) registered under the GST Act:
Avenue for Working Capital Requirements
GST Business Loans act as a channel to avail funds for the working capital requirements of a borrower in compliance with the GST regime. The tenure of term loans provided under the GST surrogate program by various lenders can go up to 36 months.
Flexible Repayment Options
An Overdraft loan facility provided as a GST Business Loan allows for flexible repayment wherein the borrower can repay the lender according to the working capital cycle of the business. This is specifically beneficial for MSMEs that may have a significant time lag in the liquidation of their inventory, leading to a positive working capital cycle.
Wider Eligibility
In contrast to conventional Business loans that check the creditworthiness of the borrower based on the financial records of the business, the credit score, and have stringent rules for entity type, GST Loans primarily rely on the GST returns of the borrower and various entity types indulged in trading/manufacturing/services sectors are eligible to get a GST-based Business Loan as long as they are GST registered and in compliance with the taxation rules.
In addition, Doctors, CAs, Consultants, etc. with a GSTIN and GST returns filed from time to time are also eligible for GST-based loans offered by some lenders.
Eligibility Criteria for a GST Business Loan
The eligibility criteria for GST Business Loans vary from lender to lender, however, it is usually determined based on the following scheme:
GST Registration
The borrower must have a valid GST Registration Certificate and be in compliance with the rules under the Goods and Services Tax laws (GST laws).
Business Vintage
The threshold for Business Vintage varies from lender to lender, with the minimum Business Vintage of at least one year.
Business Profile
Usually, lenders provide a GST-based loan to businesses that are indulged in manufacturing, trading, or the services sector.
Minimum Turnover
Lenders usually set a requirement of a minimum turnover or sales while providing a GST Business Loan which may be for more than one year to check consistency in sales.
Age of the applicant
Lenders usually have a threshold and an age ceiling for the borrower, with the minimum age of the applicant starting from 21 years and the maximum age reaching up to 65 years at the end of the loan tenure.
Documents required for a GST Business Loan
The following documents are required for GST Business Loans:
GST Registration
A valid GST Registration under the GST Act is required. It may be a provisional registration (GST-REG25) or a Final one (GST REG-6).
GST Returns
GSTR-1 for the past 3 months or GSTR-4 for the previous quarter is required for the assessment of the past track record of the turnover of the firm.
KYC Documents
KYC documents like Aadhaar Card, PAN Card, etc. are required.
Financial Documents
Past 2 years’ Balance sheet, ITR, Profit and Loss Statement and Banking Statement of the past 6 months may be required.
Asset Documents
In case the GST Business Loan is against the hypothecation of an asset, the documentation proving the asset’s ownership is a requirement.
You may Also like:
- What is Overdraft facility? Meaning, Types and How it Works
- What is a Secured Business Loan? Types, Eligibility, Documents
- Term Loan vs Overdraft Facility: Meaning, Pros and Cons, and Key Differences.
- Pros and Cons of Purchase order financing
- What is Supply Chain Finance – Types, Benefits & its working
FAQs
Who is eligible for a GST business loan?
Sole Proprietorship firms, Partnership firms, Private Limited Companies, and Public Limited Companies among others indulged in trading, manufacturing, or services sector with a valid registration certificate under the Goods and Services Tax Laws are eligible for a GST Business Loan.
Suggested Read: Explore 7 Types of Company Registration In India
What is a GST business loan?
A GST Business Loan is a loan facility provided to businesses against their GST returns to address their working capital requirements. It may be fund-based or non-fund-based. The tenure of a GST-based loan is usually short-term, ranging up to 36 months.
While some lenders provide collateral-free GST Business Loans, other lenders offer GST loans against the hypothecation of inventory or account receivables.
Is GST applicable on business loans?
While a service tax is applicable on a Business Loan, no GST is paid on the interest payment on the outstanding loan amount of the Business Loan.
Can I get a loan through the GST number?
Yes, a business can get a loan through their GST number and based upon their GST returns if the business has been in existence for at least one year or any other requirement mentioned by the lender.
What is the limit of the GST loan?
The limit of a GST Loan depends upon the type of loan facility provided by the lender and the business profile of the borrower along with their financial records.
While ICICI Bank provides for an Overdraft Facility of up to INR 2 crores against GST returns of a business, Bank of Maharashtra provides a maximum of INR 10 crores as a GST-based loan.
What are the documents required for a GST loan?
To apply for a GST loan, the borrower may have to submit the following:
- GST Registration Certificate (GST-REG25 or GST-REG6)
- GST Returns (GSTR-1 of the past 3 months or GSTR-4 of the past quarter)
- KYC documentation like Aadhaar Card, PAN Card, etc.
- Bank Statements of the past 6 months, Balance sheet (past 2 years), ITR (past 2 assessment years), Profit and Loss Statement (past 2 years).
- Property papers if applicable.
What is the interest rate on a GST-based loan?
Lenders usually offer competitive interest rates on GST-based loans as per their policies, the borrower profile, and the type of facility provided. In some cases, the interest rate on a GST-based loan may be linked to the repo rate, ie. RLLR linked.
