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Ultimate Guide On KYC For Business

21 Jun 2019

Aakash, a budding entrepreneur, is quite confident and happy as he is living his dream with the startup. When the startup turned 2 years old, he started looking for funds to scale up operations and decided to apply for a business loan. With expert advice from his friends in the business fraternity, he stacked up every document in place and so an easy loan approval was anticipated. But then the reality struck and his loan was rejected. The reason for the disapproval was that the bank could not ‘know their customer’ due to the lack of enough KYC documents. 

Well, in today’s scenario when financial crimes are on the rise, the importance of KYC cannot be underestimated. Let’s get closer to understanding everything about KYC for business.

What is KYC?

In many fraudulent instances, a loan is procured with a bogus or incorrect address of the applicant. By the time the bank’s collection team visits that address for loan repayment, the ship has already sailed!

 ‘Knowing’ is usually the first step towards trust-building. When it comes to using some financial product – like a bank or payment gateway which is entrusting an individual with their money, then it is all the more important to know the trustworthiness of an individual in order to prevent any financial fraud like money laundering, identity theft, cybercrime and other such cases. For this purpose, RBI (Reserve Bank of India) has incorporated a mandate as Know Your Customer (KYC) in order to know the customers better and protect them from any of the financial crimes. 

In general, a bank requires KYC documents for-

  • Identifying, locating, and authorising a customer
  • Fulfilling the bank’s internal risk management
  • Complying with RBI’s Prevention of Money Laundering Act
  • Monitoring transactions for tax and regulatory purposes

These KYC documents are generally required at the time of opening of a savings bank account, fixed deposit, mutual funds, insurance, loan procurement, gas connection and even for getting a SIM card for your phone.

What are the benefits of KYC?

If all this while you’ve been thinking that KYC is merely an obligation that you have to meet, then you need to think otherwise. In today’s time, all the major companies and organisations carrying out KYC is to ensure that their consultants, distributors and other agents are not involved in any unlawful activities such as bribery. KYC makes many things transparent and also seals it with a stamp of trust. 

The many advantages of KYC are listed below-

  • Gives proof of customer’s credibility
  • Ensures legitimacy & transparency of monetary transactions 
  • Avoids tax, legal and reputational problems
  • Combats criminal acts like money laundering, black money, bribery, fraud, etc.
  • Secures investors and their assets
  • Protects from fraud and loss due to illegal funds and transactions

The KYC documents list includes-

KYC majorly has two parts, one is identity verification and the other is geographical address proof. The necessary documents are as under-

Standard Identity Proof- (You can choose any one)

  • Valid Indian Passport
  • Photo on Pan Card
  • Voter’s ID Card
  • Photo on Permanent Driving License
  • Photo on Ration Card
  • Government Employee ID Card for Government Employees
  • Defence ID Card For Defence Personnel

Standard Address Proof- (You can choose any one)

  • Valid Indian Passport
  • Voter’s ID card
  • Permanent driving license
  • Electricity/water/phone bill (not more than 3 months old)
  • Gas pipeline connection card or bill 
  • Property tax bill (maximum 3 months old)
  • Employer’s certificate for residence proof
  • Domicile certificate (with address) issued by a municipal corporation

Depending on the policies of a financial institution, there can be other identity and address proofs which can be accepted by different banks or asset management companies or insurers as standard. It’s always advisable to read the Terms & Conditions of such financial institutions before applying for a business loan.

Why is KYC needed for a Business Loan?

Every business in its growth stage needs additional funds. These funds can be in the form of funding from venture capitalists or can be from a bank or NBFC in the form of a loan. A loan application process in banks & NBFC’s is judged on the basis of creditworthiness of the applicant. Also, a strict background check based on the documents is equally important from the lender’s point of view to ensure the repayment capability of the applicant. 

Basic KYC documents for business needs is thus important from a lender’s perspective so that documents are very well verified and necessary risk assessment can be evaluated. It makes the entire loan process streamlined and fast, especially when the supporting business loan documents are transparent and invokes the sentiment of trust and confidence in the lender.

Hence, it is important for people to understand that the business loan documents they need to gather & submit are just as important as their business loan requirements are. 

What Documents are needed for a Business Loan?

If a person wants to avail a business loan so as to manage the cash flow, upgrade business equipment or upscale the business then they can apply for a business loan easily with the help of NBFC’s like KNAB Finance. As each financial institution has specific requirements, criteria and eligibility it is important to know about the basic documents that are required for procuring a business loan.

Here is the list of business loan documents generally required in India-

  • Your business plan
  • KYC documents (Address & ID proof of applicant & business entity)
  • FinancialLast 2 year’s VAT returns/GST challans/ITR copy duly audited by a CA practitioner
  • Bank – Current account statement of last 1 year and/or Savings account statement of last 6 months
  • Additional document(s) may be required for credit assessment for loan processing request depending on the loan requirements

Once you meet the eligibility requirements and submit all the required documents, the bank or the NBFC will provide the best business loan options based on the business requirement. 

Useful Tip on KYC For SME Borrowers

It’s commonly observed that most of the Small & Medium Enterprises discover the need for a business loan, documents and qualification only when they are in urgent need of a loan. In such an urgency, collecting all the necessary business loan documents kill their precious time and so the opportunity is also lost by that time. 

As we understand that for you and your business, “Time is Money”, it is usually recommended that for such cases, maintain a loan documents checklist and keep it handy at all times. It is always advised to keep updated copies of KYC, ITRs, bank statements and other documents that are required for a business loan.

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