Each business is unique and hence have specific requisites. Business loan plans offered by various banks and financial institutions across the country are customizable and customer satisfaction centric to offer business owners with a wide array of financing alternatives.
A small business loan is the safest and easiest option to appropriately finance your business objectives. Banks and financial institutions now offer tailor made loans based on the nature, scope and goal of your requirements.
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Reasons to Avail a Business Loan
There are multiple reasons for applying for a business loan. However, you should opt for this scheme only when:
- You have a strong business plan
- You foresee a decent cash flow in future through the business
- The capital return of your business is greater than the interest of the loan borrowed
Below mentioned are the circumstances under which you can take a business loan in order to meet your financial requirement:
While establishing a new business If an entrepreneur has a business idea that he or she wants to turn into an endeavour with potential income, a business loan can be availed in such a scenario to meet his or her financial needs. However, in order to ensure your loan gets approved, you should make sure that your idea is good enough to generate substantial profits in order to repay the loan interest. You should also make sure that the overhead cost of the business is not high enough to cause a negative impact on the business and its profitability.
For business expansion Opting for a business loan is a great way to arrange for the funds required during the expansion of an organisation. Business expansion can include starting a new department, launch of a new product, upgrading an operation or product, venturing a new area or market, etc. Additionally, the chances of loan approval for an existing business are usually high owing to the fact that it holds a proven track record.
To purchase machinery and equipment When dealing with a high-demand product, it is essential for the business to maintain a regular supply to the market. In order to do this, the organisation might have to increase production by investing in equipment and machinery with the latest technology. Furthermore, a company might also need to buy equipment during an expansion. Business loans are a great way to meet the credit needs during such a situation.
To manage cash flow within the organisation It is difficult for small companies to ensure there is a healthy amount of cash flow within the organisation. Therefore, a business might face a shortage of money to fulfil its liquidity requirements for a working capital such as utility bills, overhead salary, inventory management, rent, etc. However, this problem can be solved if a business owner opts for a loan to meet the company’s temporary financial crisis.
Require working capital for business When the cash flow is low within an organisation due to numerous reasons such as market boom and increase in operating cycles, it is difficult to manage regular expenses such as salaries, supplies, and raw materials. In order to keep the business running and to recover from such a financial crisis, an entrepreneur might decide to avail a business loan and keep the business operational.
To turn business losses into profits A business loan can also be availed to receive the funds required in order to turn a business around that has been incurring losses for some time. Even though many lenders are skeptical when funding a less successful/unsuccessful business, corporate applicants with a practical plan that includes major changes in business operations or introduction of a new product might convince them to do so.
To repay previous debts It is always a smart move to repay multiple small debts using a large loan in order to avoid paying a huge amount of money as interest. A businessman can also choose to do the same by availing a business loan.
While running a seasonal business If you are operating a business that is in demand only during a certain time of the year then it might be difficult for you to manage the expenses when the orders start rushing in. In that case, you can secure a short-term business loan to offer undisrupted service to your customers and can repay the loan using the profit earned after the peak season is over.
Types of Business Loans
Overdraft facility In an overdraft facility, the business owner can withdraw a larger sum than the amount present in the account as a loan to meet his or her business needs. The maximum amount that can be withdrawn and the interest rate under this facility is based on a mutual agreement between the lender and borrower.
Term loans In case of a term loan, a borrower can avail a secured or unsecured loan to receive the funds according to the situation and requirement of the business. These loans are helpful in acquiring long-term assets. There are three types of term loans based on tenure namely short-term loan, long-term loan, and intermediate loan that can be repaid on a monthly or quarterly basis. While the rate of interest for such loans can be fixed or floating, it varies according to the loan repayment tenure.
Demand loans When an entrepreneur withdraws a demand loan to meet the financial requirements of his or her business, the amount has to be repaid whenever the bank or non-banking financing company (NBFC) recalls it. Demand loans can be both secured and unsecured and are ideal to meet a short-term financial crisis. While the maximum term for this type of a business loan can be 12 months, the merchant can choose to renew it when the term has ended.
- Loan against securities At the time of a financial crisis, a business can also decide to opt for loan against its financial securities that are approved by the bank such as mutual funds, fixed maturity plans, insurance policies, saving bonds, demat shares, exchange-traded funds, etc.
Bill or invoice discounting Another way for businesses to receive financial aid during a crisis is by opting for bill discounting. In this financing method, a company can get access to instant cash by providing the invoices of its credit sales as collateral.
Letter of credit facility This type of financing scheme can be availed by a business based on the creditworthiness of the buyer’s bank when the buyer and the seller do not know each other such as during international trade transactions. In this case, the bank pledges on-time payment to the seller after taking account of its origin certificate, insurance certificate, transportation documents, legal documents, and other commercial documents. However, if the buyer fails to make the payment, the bank is liable to pay the entire outstanding amount.
Cash credit facility The cash credit facility is an overdraft loan that can be availed by a business to finance its need for working capital by offering its current assets such as receivables, inventory, etc. as collateral. The maximum amount that can be withdrawn using this scheme is dependant on the stock margin fixed by the bank. The tenure of this loan can be renewed at regular intervals of 12 months.
Bank guarantee Whether you own a public/private limited company or proprietorship/partnership firm, you can avail this pre-approved secured loan by offering residential, commercial, or industrial property as collateral. This financing scheme helps companies secure down loans, buy the required equipment, or cover any additional costs that will help the organisation grow. In this kind of a business loan, the financing company promises to pay the stakeholders of the guaranteed business in case it defaults.
Business loans for women entrepreneurs In a bid to promote women empowerment, numerous banks and NBFCs offer special loan schemes to existing and potential women entrepreneurs. These exclusive schemes offer a lot of benefits and special discounts in terms of quantum of loan, interest rate, security, etc. Furthermore, female entrepreneurs can also benefit from the consulting, training, and counseling offered by several lenders to help them learn about various aspects of the market and industry. However, these loans are only available to women who hold more than 50% shares of a company.
Features of Business Loan
Before you choose to apply for a business loan to start a new business or expand the current one, you should learn about the features of a business loan.
- The corpus for a business loan depends on numerous factors such as the amount of profit it makes annually, valuation of the business, and operating industry of the business in addition to the number of years it has been operational.
- These loan applications usually get approved fairly quickly and sans any hassle during processing. Most banks and financial institutions provide their customers with the promise of secured lending solutions when it comes to business loans.
- Since business loans carry flexible repayment options along with minimal documentation, they have become one of the most preferred ways for entrepreneurs to meet the financial needs of their businesses.
Benefits of Business Loan
Unsecured business loans enable businesses to fund their exact exigencies and repay their loan amount in easy EMIs (equated monthly instalments). These loans can be availed for a variety of reasons, including but not limited to, business expansions, working capital, etc.
Banks and financial institutions offering business loans also provide their customers with the flexibility of doorstep service. Additionally, business loans in India usually don’t expect any collateral, guarantor or security from the applicant.
Some banks offer customers with the facility of business loan eligibility in 1 minute, either online or in any of their branches. These speedy approvals ensure that customers don’t waste any of their time waiting to hear from banks about the status of their loan application.
Business loans come with the added benefit of services such as SMS, Web Chat, Phone Banking, etc. Some banks even extend exclusive higher loan amounts to their self-employed customer base.
Business Loan Eligibility
Business loans are intended towards helping small businesses to meet their capital and other requirements. Broadly, the following categories of people can avail a business loan
Self Employed Professionals
This category includes, Allopathic doctors, chartered accountants, company secretaries, architects, etc. This is subject to the applicants who have proof of qualifications and also are practicing their profession.
Self Employed Non Professionals
This category includes traders and manufacturers.
Following entities can avail a business loan-
- Limited Liability Partnerships
- Private Limited Companies
- Closely Held Limited Companies
Furthermore, applicants have to fulfil the following criteria in order to be eligible for a business loan-
- Minimum turnover of Rs.40 Lakhs
- Minimum 3 years’ experience in current business
- Minimum 5 years of total business experience
- Business should be making profit for last 2 years
- Minimum Annual Income (ITR) is Rs.1.5 Lakhs per annum
- Minimum age of applicant is 21 years
- Maximum age of applicant is 65 years at the time of loan maturity
Documents Required for Business Loan
In order to apply for a business loan, you will require the following documents-
- PAN Card for company, firm or individual
- Proof of ID, in the form of, copy of Aadhar Card, Passport copy, Voter’s ID copy, driving license.
- Proof of address, in the form of, copy of Aadhar Card, Passport copy, Voter’s ID copy, driving license.
- Bank statement (last 6 months)
- Latest ITR along with computation of income, balance sheet and P&L account for the last 2 years. All financials must be CA certified or audited.
- Proof of continuation (ITR/Trade License/Establishment/Sales Tax Certificate)
- Sole Proprietorship Declaration or certified copy of Partnership Deed
- Certified true copy of Memorandum and Articles of Association
Business Loan Interest Rates
The rate of interest charged on business loans varies from bank to bank. Usually, a nominal processing fee is charged subject to the minimum as well as maximum cap, depending on the bank. In some cases, a CIBIL Report Copy charge is also levied on the applicant.
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Business Loan EMI calculator
EMI calculators are the quickest and easiest way to calculate your EMI accurately. You are required to provide the calculator with some standard information. This may include, the loan amount that you require, the interest rate that will be charged to your loan, the duration you expect to take the loan for, etc.
Once you feed the above information into the calculator, the calculator will give you an estimate of how much you will be expected to pay each month as repayment instalments towards your business loan.
Top Financial Service Providers That Offer Business Loans in India
- HDFC Bank
- ICICI Bank
- State Bank of India
- Kotak Mahindra Bank
- Bank of Baroda
- Federal Bank
- Bajaj Finserv
- Fullerton India
- TATA Capital
- Magma Fincorp
- Au Financiers
- Capital First
- Mahindra Finance
- Aditya Birla Finance
- HDB Financial Services (HDBFS)
Business Loan FAQs
- What security should I provide to avail a business loan?
No security or collateral is required in order to avail a business loan in most cases, though a thorough evaluation of your documents would be needed to confirm that.
- I am a doctor and have been practising for 10 years now. Can I get a business loan to set up my independent practise?
Yes, business loans are offered to all practising professionals, subject to proof of qualification being documented.
- Will I be required to share my personal information with the EMI calculator to calculate the EMIs on my business loan?
No, you will not be asked for any personal information while calculating your expected EMI. The EMI calculator only requires the loan amount that you intend to apply for, the tenure of the loan and the rate of interest.
- For what purposes can I avail a business loan?
You can apply for a business for any of the following or related purposes-
- Small business finance
- Working Capital finance
- Home renovation
- Business expansion finance
- Child’s education, etc.
- How long will it take for me to find out if I am eligible for a business loan?
Business loans usually are offered speedy approvals and most banks offer applicants with the convenience of business loan eligibility in 1 minute. This facility can be availed online or any of the bank’s branches.