Taxes and loans!! Seem to be two distinctly different things. But that is really not the case. If you get to look at them critically, you would get to realize that there are certain things that link the two. Especially when it comes to the people who are generators of employment or put it simply who are self-employed. Find it strange. Read on to know more.

Case Study

Rajiv Rai, a budding entrepreneur started his own venture three years back. Due to his acumen and hard work he was able to get to the point of breaking even in the very first year and the venture made profits from the second year itself. A great feat to have been achieved. He now needed funds to expand his business and thought of applying for a loan. He was sure that given the status of his business he would be able to secure a speedy disbursal. He even undertook his CIBIL score check to be on a safer side. However, it turned out to be a nightmare to him and he had to run from post to pillar to be able to get to a situation where his application was finally even moved for evaluation by the credit underwriting team.

Where did he go wrong? What were the gaps that he had to fill up before he could even get to the level of a complete application form?

Reasons of rejection

Reason 1

He had not filed his income tax return for last two years. While he did file it for the first year, his tax returns were pending.

Reason 2

Even while he filed the same at the behest of the bank, the taxes paid were quite minimal and did not show the income in true light.

Reason 3

His newly filed tax returns for last two years were filed at the same time which is at times is not accepted by the lenders.

What does a lender look at?

Let us understand on what does a lender looks at while evaluating the application for a loan.

• Capacity to repay
• Stability of business
• Intentions to repay

Let us now understand how does each one of these is linked to payment of taxes.

• Filing of tax returns in time indicates towards the individual’s approach to work within the time lines. This is an important factor since the lenders want the money to be paid on or before the due date. Any delay will cause them a loss and this would be the last thing that the lender would want to happen.
• It also indicates that the person is diligent on his financials. This is again an important factor. The chances of failure for a person who keep a close watch on his financials are comparatively lower than the one who does not do so.
• Payment of adequate and correct taxes also directs that the person is high on character and is responsible towards the obligations which is an important factor considered by the lending institutions.
• An increased amount in taxes over years and timely payment only show the strength of business and give comfort to the under writer that the business is in safe hands and unless something really drastic happens, the person should be able to make money over coming years.
• Lower taxes only prove that the income is low and there may be a situation where the lower income would become a hindrance in securing the credit line that is desired to push your business to the next level.
• A higher income can also result in the securing a lower personal loan interest rate

All the above factors clearly establish that paying your taxes in time and paying them as per the income will only help in building a case for getting loans at the time where your business requires those funds to grow.

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