Many small businesses often face financial challenges, particularly regarding cash flow management. They frequently rely on short-term loans when payments are delayed or unexpected expenses arise. However, conventional business loan procedures can be time-consuming, with lenders typically requiring collateral or detailed tax returns to verify income stability. GST business loans offer a solution to many of these issues. This article explores business loans linked to Goods and Services Tax (GST) returns, outlining their features, benefits, and application process.

What is a GST Business Loan?

Following the government's implementation of the Goods and Services Tax (GST) in 2017, banks introduced a new short-term loan product designed for micro, small, and medium enterprises (MSMEs) to cover their working capital requirements. These are primarily term loans, with approval based on the turnover reported in GST returns. This is why they are commonly referred to as GST business loans. The minimum loan amount available under the GST loan scheme can start from ₹1 lakh, extending up to ₹3 crore, though the exact maximum varies by bank.

Features and Benefits of GST Business Loans

Many banks provide GST loans to MSMEs, and their specific features can differ among lenders. However, these short-term loans generally share common characteristics:

• No Income Proof Required for Eligibility: GST business loans are approved based on the turnover declared by a company in its GST returns. Borrowers are not required to submit income and asset proofs such as balance sheets, profit and loss statements, current account statements, or other financial documents related to the company.
• Collateral-Free (Unsecured) Loan: These business loans are entirely unsecured, meaning no collateral is needed. Therefore, a company obtaining a GST loan is not obligated to mortgage or secure any assets with the lending bank.
• Fast and Contactless Loan Processing: Banks can approve these loans quickly, often instantly, based on the borrower's business turnover (as reported in GST returns) as a principal eligibility factor. This significantly accelerates loan processing and disbursement compared to traditional business loans.
• Simplified Documentation: When applying for GST loans, borrowers only need to provide basic business-specific documents, including a PAN card, trade license, address proof, and the GST registration certificate.

These features make GST business loans particularly advantageous for micro and small businesses. Some key benefits of a GST loan include:

• Easy Access to Short-Term Capital: Many MSMEs operate in seasonal industries, where managing cash flow and working capital during peak periods can be a major concern. A lack of readily available working capital can lead to missed business opportunities and substantial financial losses. GST loans have made it simpler for small companies to acquire short-term capital. Additionally, many banks offer overdrafts, bank guarantees, and letter of credit facilities alongside GST loans.
• No Restrictions on Fund Utilization: As an unsecured loan, lending banks cannot impose restrictions on how the borrowed amount is used. Borrowers are free to use the funds for any legitimate business purpose, provided they adhere to the repayment schedule. For example, a company might use a GST loan to finance working capital, renovate business premises, settle tax demands, or address any other business-related need.
• Rapid Disbursement for Urgent Capital Needs: Most banks process and disburse GST loans within 2 to 3 days. This makes GST business loans a reliable option for companies requiring urgent access to funds.
• Lower Cost Compared to Other Short-Term Debts: Since traditional business loans can take time to process, MSMEs often turn to private financiers and Non-banking Financial Corporations for short-term capital, sometimes at higher interest rates. Borrowers with strong credit scores can secure GST business loans at rates as low as 8%.

Eligibility Criteria for GST Business Loans

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

• Registered and Legal Entities: Only registered entities are eligible to apply for this loan.
• Valid GST Registration: Proper GST registration and timely filing of GST returns are essential. Banks may reject applications from companies involved in GST disputes or those with outstanding tax dues.
• Minimum Three Years of Operational History: Most banks require applicants to have maintained continuous business operations for at least three consecutive years.
• Minimum Turnover Criteria: The required minimum business turnover threshold depends on the size of the loan requested.
• Credit History: While GST loans are primarily approved based on business turnover reported in GST returns, interest rates can vary based on the borrower's credit history and financial stability. Companies with no credit history or a poor track record may face interest rates as high as 25% per annum.

Required Documents for a GST Business Loan

Applicants for GST loans must submit the following documents along with their loan application:

• Personal KYC: PAN card.
• Residential Proof: Any one of the following: Rent Agreement, driving license, voter's ID, ration card, Passport, or UIDAI card.
• Banking Continuity: Current account statement for the last 6 months.
• Business KYC: GST registration certificate, along with a trade license and business PAN card.
• GST Returns: GST returns for at least the last 6 months.

Please note that this list is not exhaustive, and specific requirements may differ depending on the bank where the application is submitted.

How the Loan Amount is Calculated

Banks consider GST loans as unsecured business loans. Consequently, a borrower's credit score, business performance, and financial stability significantly influence the maximum loan amount and the applicable interest rate. To assess a borrower's business performance, banks refer to at least six months of GST returns. Banks may employ various methods to determine credit scores and financial propriety, including reviewing past financial transactions, repayment history, and records of tax defaults.

Types of GST Business Loans

Unsecured business loans based on GST returns can encompass several forms, including:

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

GST Business Loan Application Process

Most commercial banks follow a standardized application process for GST-based business loans. Borrowers must complete and submit a loan application form along with the necessary documentation. Many banks also facilitate online applications and soft document uploads, allowing for a completely contactless loan processing experience.

Interest Rates and Loan Tenure

Interest rates on GST business loans can range from 8% to 26%, depending on the loan amount, the borrower's creditworthiness, and their financial transaction history with the specific bank. The maximum loan tenure available is typically 36 months.

Challenges and Considerations

While GST-based business loans offer significant benefits to micro and small businesses with limited financial liquidity and assets, linking these loans to GST returns can present new challenges. During the loan processing, banks access an applicant's GST data, including details on ongoing compliance proceedings and past cases. Any history of late GST payments, tax demand notices, delayed return filings, or other compliance issues can negatively affect the loan eligibility of many MSMEs, even if they have sufficient turnover and repayment capacity. Therefore, companies seeking GST loans should prioritize GST compliance and resolve any past compliance problems to maintain a strong creditworthiness score.

Tips for a Successful Loan Application

Any company planning to secure GST loans should follow several steps to obtain these loans on more favorable terms:

• Resolve any existing GST compliance issues.
• File GST returns promptly and avoid late tax payments.
• Carefully maintain GST registration and other essential business documents.
• Compare loan rates and terms from multiple banks.
• Foster healthy financial relationships with banks.

Frequently Asked Questions

What is a GST loan for businesses? A GST loan for a business is an unsecured loan processed and approved based on an applicant's Goods and Services Tax (GST) returns.

How much can one borrow with a GST loan? The maximum GST-based short-term business loan amount can go up to ₹3 crore, though this varies by bank.

Who qualifies for the MSME GST loan scheme? GST loans are available to Sole Proprietorships, Partnership Firms, Private Limited Companies, and Public Limited Companies.

What is the maximum borrowing limit for GST business loans? The maximum limit for bank borrowings under GST business loans is typically up to ₹3 crore.

What is the longest loan period for a GST-based loan? The maximum tenure for a GST-based loan is 36 months.