- Business Loans can be availed for as small an amount as Rs.30,000. Larger amounts can be availed depending on various factors including the size of the business, reported profits of the business, existing business liabilities, etc.
- Business loans in India are offered in a manner similar to personal loans. Therefore, the documentation to avail a business loan is simple and the turnaround time is relatively short.
- Business Loan tenure can be from 12 months to 48 months. In most cases, the borrower can also avail the benefit of prepayment in lieu of a nominal prepayment charge, which provides additional flexibility to the borrower.
- Business loan interest rates varies from 17% to 25% which depends on various factors including but not limited to eligibility of the applicant, the size of the business, credit rating/score of applicant, type of business and loan quantum/tenure.
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About Business Loan
Overdrafts: An overdraft means overdrawing from a current account. In simpler words, an account holder can take out more money than what has been deposited in the account in order to meet business requirements. An agreed rate of interest will be charged if the overdrawn amount is within the limits of a preceding agreement. What’s more, in case, the business does not avail the overdraft facility, no interest charges will be applicable.
Term loans: Currently many types of term loans are available such as short term loan, long term loan as well as intermediate term loans. An entrepreneur can avail these loans according to his/her requirement and economic situation. Usually the minimum tenure for a short term loan is 3 years and for long term loan it is 10-15 years, there will be some variations in applicable interest rates depending upon the loan tenure. In most cases, the lender charges a pre-payment penalty in case the borrower decides to foreclose the loan.
Term loans are divided into two major categories – unsecured business loans and secured business loans. In case of a secured business loan, acceptable collateral or security for availing the loan includes commercial/residential/industry property and machinery. These secured business loans usually feature lower interest rates as compared to an unsecured business loan as they are deemed to be less risky by the bank.
Bill discounting: This process gets the borrower instant cash back on various large purchases and this essentially amounts to discount on the credit sales. All one need to do is to submit the important documents which validate business transactions like invoices, transportation receipts, bill of lading etc.
Letter of credit: A letter of credit is issued by the buyer’s bank which declares that a seller will receive the payment in full when all the terms and conditions regarding sale and delivery have been completed. This situation generally arises in international business finance where seller and buyer are often unknown to each other, therefore the business transactions is done on the basis of bank’s credit worthiness.
If a business owner needs to apply for a business loan and want a bank to consider their application, then it is necessary to meet the eligibility criteria of the bank. Even though the specific criteria may differ from one lender to another, a majority of the eligibility for unsecured business loans is remarkably similar. In case of secured business loans, the value of the asset used as collateral plays a major role in determining the applicable loan features. In case one meets all the necessary eligibility requirements for a quick business loan, then the chances of loan approval are high. So, before applying for a business loan, the prospective borrower must check the applicable eligibility criteria. The following are some pointers for availing a business loan that one must keep in mind. The following are some key entities that are eligible for business loan:
- Self-employed businessmen/professionals
- Limited or private limited firm
- Manufacturer, retailer or service provider
All these entities need to meet the following criteria to avail business loan:
- The business owner/professional must be aged between 21 years to 65 years
- The business should have been operational for at least 3 years
- The business turnover must be at least Rs.50 lakhs per annum with minimum 2 lakhs of profit, however lower amount loans may also be availed as per the lender’s discretion.
- The business owner/business must submit the last 3 years of ITR statements.
- A business partner can be a co-applicant in the business loan application. This is in fact recommended as it would increase the probability of getting a loan of higher quantum with longer tenure and interest rate.
The following are some key documents that need to be submitted by an applicant who plans to take a business loan:
- Last 3 years’ Income Tax statements
- Bank account statements
- Business proof
- Applicable certification related to practice
- Proof of ownership of the possessions which are used for business purposes
- Recent photographs of applicants
- Identity proofs such as Aadhar Card, Voter ID Card, PAN Card, Company registration certificate, etc.
- Residence proof of applicant
- KYC documents of the co-applicant (if applicable). In case business loan for women is the category of choice, proof of majority ownership by the woman needs to be provided by the investor.
The quantum of business loan depends on the valuation of the business, annual profits of the business, the industry within which the business operates as well as the number of years of operations. Lenders are also liable to check the cash flows and other aspects of revenue generation. Once the lender has considered the applicable criteria, the business loan application is either accepted or denied. However, the profitability of a business is among the. The main criteria of approving a business loan as it plays the key role in determining how the business will manage to repay the EMIs and various expenses related to the business.
Like any other loan, business loan lenders mainly focus on analysing the credit worthiness of a business by checking the reliability and repayment ability of the business. To perform this analysis, banks generally look at the applicant’s/applying company’s financial history and also all applicable business records.
A start-up might face difficulty in getting a loan because it will be tough for the banks to assign a loan to companies that have a relatively short financial history. In this case, the lender usually grants a personal loan to the applicant, which can then be used to expand/set up the business. In order to grant a business loan to an individual, banks usually examine the individual applicant’s prior financial background, credit history, liabilities, other debts (if any), education and business plan of the applicant. A well planned and researched business plan shows the applicant’s dedication towards their business and the capital that has been invested in the business. These factors are also considered by the bank.
Banks have even started schemes of approving loans on the basis of good credit score/credit rating and repayment record of their existing loans. These factors also tend to affect the business loan interest rate that is applicable to the specific case. Additionally, applicants should also keep in mind that applying for multiple loans can also restrict their ability to take on additional credit as it increases the overall liabilities of the company.
An additional factor to consider is insurance. Having insurance of equipment, buildings, raw material stocks, finished products etc. provides additional financial stability to the company. As banks are always concerned about the security and risk factors attached to a business, some of the banks even insist that the prospective business loan applicants to get insurance before approving their application for business loan especially in case the applicant is a small business.
Therefore a well-planned and professional plan is always important before approaching a bank for a loan. One should be prepared and do a SWOT analysis of the business plan, and have thorough information about the marketplace and a roadmap of how one is going to reach the business targets.
Banks are also going to focus on medium and small business loans and long term capital loans as well as the expansion of credit amenities to new areas such as less developed cities and states in order to promote the comprehensive growth of such small businesses.
The following is a handy checklist of key business loan requirements that one must keep in mind before applying for a quick business loan: