What is a Business Loan?

The banks and non-bank financial companies in India provide unsecured business loans. The aim of these programs is to support business growth by addressing urgent business needs. To meet the business needs of a company, most financial institutions provide term loans and flexi loans. A commercial loan can also be referred to as a business loan. These loans can be acquired by all types of businesses, including sole proprietorships, partnerships, self-employed individuals, and retailers.

There are two ways you can receive a business loan from a bank. It includes either an unsecured funding arrangement or a secured funding arrangement. In order to obtain a secured loan, banks usually require collateral. A default on the loan will forfeit this collateral. It is likely that the bank will want to see the business’s financial statements, balance sheet, and business plan, and to study the credit histories of its principals.

Using a business loan, you can take care of things such as expanding your business, increasing production, taking your operation online, and buying new machinery. Your business can run smoothly if you have access to business finance. This is which allows you to quickly receive cash to make purchases and payments.

Whether you need to purchase new technology to equip the workforce, or you want to open a new store, easy Business Loans help you cover your expenses. Take advantage of Business Loan EMI options and extended loan terms offered by leading financial institutions and banks to manage your company’s cash flow.

Business loans in India are broadly classified into eight types:

1. Bill/Invoice Discounting: Basically, the purpose of bill and invoice discounting is to close the gap caused by late realization of invoiced payments. The purpose of invoice discounting is to take a loan only for unpaid invoices up to the next 90 days. While the purpose of bill discounting is to take a loan for bills due from 30 days to 120 days. Discounting invoices or bills is a great way to manage working capital needs and ensure smooth operations in a business. This feature is especially useful for companies with a limited cash reserve, like MSMEs and SMEs.

2. Equipment Finance or Machinery Loan: A machinery loan, also called equipment finance, is a form of financing available to borrowers who want to buy or upgrade machinery. The majority of businesses using equipment finance are large firms and manufacturing companies. Equipment loans can also offer tax benefits to owners of the companies. Each lender offers a different interest rate, loan amount, and repayment period.

3. Letter of Credit: Letter of credit generally refers to a funding guarantee provided by a bank or lender when a business is conducting international trade. Entrepreneurs can utilize letter of credit both for imports and exports. When doing business overseas, companies deal with suppliers they don’t know. So for this reason, they demand an assurance of payment before completing any transaction. Letters of credit are therefore crucial to suppliers because they guarantee payment.

4. Loans under Govt. schemes: A number of loan schemes have been designed by the Government of India to promote individuals, MSMEs, women entrepreneurs, and other companies in the trading, services, and manufacturing sectors. Under government schemes, loans are offered by various financial institutions. This includes private and public sector banks, non-banking financial companies, regional rural banks, microfinance institutions, small finance banks, etc. Among the top government loan schemes are Mudra Scheme under PMMY, PMEGP, CGTMSE, Standup India, Startup India, PSB Loans in 59 minutes, PMRY, etc.

5. Overdraft Facility: An overdraft facility allows a bank’s customers to withdraw cash from their accounts even if their accounts have no funds. The interest rate applies only to the amount withdrawn and is based on a daily basis. Account holders receive a credit limit based on their relationship with the bank, their credit history, their cash flow, as well as their repayment history. If you pay the interest on time, you can use the overdraft limit in any way you want. Each year there is a revision to this. Overdraft facilities are available against collateral or securities, especially in the form of fixed deposits with a bank.

6. POS Loans or Merchant Cash Advance: A POS (Point-of-Sale) Loan or Merchant Cash Advance is a structure where a business owner using his/her daily credit or debit card transactions pays a lump sum amount in advance to a supplier. Small businesses often encounter short-term cash problems. Therefore, merchants turn to POS loans to reduce liquidity constraints in their businesses. Comparatively, POS loans have a higher interest rate than other types of business loans. In retail shops, grocery stores, supermarkets and shopping malls, the repayment facility can be accessed through POS (Point of Sale) machines that process debit or credit transactions.

7. Term Loan (Short & Long-term Loan): It is a loan that must be repaid in regular installments over a set period of time. A term loan can be classified as short-term or long-term. These two types of loans have repayment terms ranging from 12 months to 10 years. Short-term loans are of a shorter duration, usually 12 months, while long-term loans are longer, generally up to 10 years. In terms of loan amount, the bank offers loan amounts between Rs. 1 lakh and Rs. 1 crore, or even more depending on the needs of the business. At the time of application for the loan, the lender will finalize the loan repayment schedule.

8. Working Capital Loan: Typically, working capital loans are used by businesses to cover their daily operational costs, such as buying machinery and equipment, managing cash flow, buying raw materials, enhancing inventory, and paying salaries. Generally, working capital loans have a repayment period of up to 12 months. The lender does not require collateral or security for this type of loan. This is a collateral-free loan. Due to a higher interest rate, it may cost a little more than a long-term loan or a general business loan. This type of loan is one where the bank sets a limit on the amount the business can borrow.

Having learned how to get a business loan in India, you must have a vague idea of what their features are. Access to business loans is easy and convenient with flexible EMIs and low-interest rates. You can choose the best business loan deal by comparing loan offers offered by various financial institutions, including private sector banks, public sector banks, NBFCs, regional rural banks, small finance institutions, and microfinance banks.

Frequently Asked Questions (FAQ’s) – Business Loan

In obtaining working capital as well as expanding a business, Business Loans are of great assistance. Business loans can assist in maintaining cash flow during hard times. When economic conditions change, Business Loans can help strengthen financial stability.A well-known aphorism states that if you want to make money, you must spend money, which is quite accurate.In order for your business to grow, you need to invest in your facilities, marketing, and location. Here are six reasons why your business may need a loan: a) Expanding your business, b) Saving for the future, c) Purchasing more equipment, d) Improving and Extending your marketing strategy, f) Improving your business cash flow.
In order to be eligible for a loan, you must meet the following requirements:a.)The credit score of the entity and/or the partner/director/proprietor of the borrower as reported by your CIBIL report or Equifax report, or any other credit reporting agency.b.)In order to get the approval of the Business Loan, you must have a good credit score, but that is not sufficient.c.)The bank may decide to limit the loan amount based on subjective judgment if the credit score is borderline.d.)The financial statements of the borrowing entity for the last two years are also reviewed. Among the important factors that are considered in determining the loan amount are turnover, director/partner salaries, depreciation, interest costs, and net profit after tax. e.)The debt service coverage ratio (DSCR) demonstrates whether is possible to service the EMI for the current loan. A bank typically requires a DSCR of 1.0 to 1.5 depending on case-by-case circumstances.
In simple terms, pre-closure charges are the charges levied at the time of closing a loan, i.e., paying off the borrowed principal amount including the interest.By collecting this fee, the banks hope to recoup some of the interest they will lose as they are losing interest on the amount the customer will be paying back before the end of the term. Interest revenue is the main source of income for banks.Many banks have a lock-in period of six to twelve months, while some allow you to pre-close even after the 1st EMI has been debited.To pre-close a loan, you may also only be able to use funds from your own account (and not the balance transfer check of another bank). Additionally, banks may allow pre-closures free of charge or charge a fee (usually 2 to 5% of the pre-closure amount). Before signing the loan documents, make sure you ask your bank for clarification on all of these factors.
Yes, Business Loans allow part payment. The concept of part payment is when the loan borrower chooses to pay back part of the loan before the maturity date.Part payment reduces the unpaid principal amount, and this, in turn, reduces EMIs and interest payments. The disadvantage of prepaying a loan is that even though it offers many benefits, it also carries a penalty. As such, it would be advisable for you to consult with your lender regarding the penalties involved in preclosing your loan. Therefore, it makes sense to pursue this option if the penalty is lower than the amount of interest the borrower is required to pay. In the case of a penalty that is greater than the amount of the loan interest, you will end up paying more than you were saving. Penalties associated with prepayment vary from one financial institution to another and can even vary from one loan to another. Therefore, you should carefully analyze this condition and, if necessary, have a discussion with your lending bank before making a final decision on making any part payment.
Yes. The disadvantage of prepaying a loan is that even though it offers many benefits, it also carries a penalty. As such, it would be advisable for you to consult with your lender regarding the penalties involved in preclosing your loan. Therefore, it makes sense to pursue this option if the penalty is lower than the amount of interest the borrower is required to pay. In the case of a penalty that is greater than the amount of the loan interest, you will end up paying more than you were saving. Penalties associated with prepayment vary from one financial institution to another and can even vary from one loan to another. Therefore, you should carefully analyze this condition and, if necessary, have a discussion with your lending bank before making a final decision on making any part payment.
A majority of financial lenders offer business loans up to Rs. 75 lakhs for the purpose of business expansion, with repayment terms up to 60 months. In order for a bank to decide on a higher loan amount, the bank will need to engage in a personal discussion with the borrower.
Upon approval of the loan application, the amount is credited onto the borrower's account. In the event that the loan is obtained from a bank, it would take one or two weeks for the funds to be disbursed. On the other hand, if the loan is given by an NBFC, the loan is disbursed within five to seven working days.
PAN card of the borrowing entity, address proof, last two years financial statements (balance sheet, profit & loss, audit report), last six months bank statement, VAT/service tax returns, partnership deed or Memorandum of Agreement, track record of repayment of existing loans, etc. are required. In addition, the director/partner's PAN card, KYC, house proof and ITRs are required. Depending on the circumstances, additional documents may be needed by your lending organization.
In general, all business loan repayments are made through an EMI (Equated Monthly Instalment) that is deducted from the customers' bank account. In addition to this, the customer is required to submit Post-dated Checks (PDCs) and sign an electronic funds transfer mandate in favor of the bank disbursing the loan.
In India, interest rates on a Business Loan typically ranges between 11% to 22%. Thus, an average interest rate on a Business Loan is 16.5%. It is advisable to discuss with the lender on this particular topic while applying for a Business Loan.
In India, processing fee on a Business Loan typically ranges between 2% to 3%. Thus, an average processing fees on a Business Loan comes to 2.5%. It is advisable to discuss with the lender on this particular topic while applying for a Business Loan.
The EMI will be due on a fixed date every month. You will be advised of this by the lending bank at the time of disbursing the loan amount to you.It is mandatory to repay the loan amount to the bank within a specific period of time. The principal amount as well as the interest is repayable in the form of monthly instalments over a predetermined period of time.In a nutshell, the repayment schedule is the instalment plan by which the loan is repaid through a series of payments that include both the principal amount outstanding and the interest component. Alternatively, it is also referred to as an amortization table.
A bank will impose certain bank charges and penalties for ECS bounces. Additionally, your credit report will be affected. Depending upon the severity of the default, it may adversely affect future credit opportunities such as securing a home loan, the ability to obtain a car loan, etc. Banks can take legal action against borrowers who fail to repay defaulted EMIs within a certain amount of time.
Collateral is the security that is pledged in return for a loan from a bank. The higher the collateral value, the greater the benefits. Collateral serves as a form of protection for the lender. So, in the event that the borrower defaults on the loan, the lender is able to seize the collateral and sell it in order to recover some or all of its losses. Thus, as a security for secured business loans or collateral business loans, a company’s assets such as land, property, or equipment is required to be pledged as a collateral. With a secured Business Loan, you may be able to extend the duration or reduce the interest rate. Secured loans are provided to the entities with a short track record and low assets, which are unable to obtain financial aid from commercial banks. Therefore, the borrowers will be able to develop their business and build an unencumbered portfolio gradually.
It is prudent to check your CIBIL score when seeking funding for your business. An excellent credit score not only increases the likelihood of you being approved, but it also accelerates the approval process. As a result, it creates a credible identity for your company in the eyes of lenders, thus strengthening your Business Loan application. A business loan can be obtained from any bank if the applicant has a good credit rating. With a higher credit score, you will be able to enjoy greater benefits as well as lower interest rates.
You will be more likely to obtain a Business Loan if you maintain a good CIBIL score. For a Business Loan application to be approved, a score of 750 is generally considered acceptable.
Obtaining a Business Loan enables you to acquire capital and invest it in your business. You can use the funds for a number of purposes including working capital or improvements, such as renovations, technology and employee recruitment, business acquisitions and real estate purchases. These uses must be related to business growth or improvement. Personal use of the funds is prohibited.
No, that is not possible. There are some business owners who make the mistake of paying personal expenses with cash from their business line of credit. When a lender learns that a company owner has used a business line of credit for personal purposes, they will be called upon to pay the balance due. In this case, if you do not repay the balance immediately, the lender may take legal action.
In order to qualify for a Business Loan from most lending institutions, you should have been in business for at least one to two years.
An EMI is calculated using the following formula: EMI = P * r * (1 + r)n/(1 + r)n - 1) where P is the loan amount, r is the interest rate, and n is the term.
An enterprise should have a minimum annual income of Rs. 1.5 lakhs. At the time of applying for the loan, the applicant should be at least 21 years of age, and should not exceed 65 years of age at the time of loan maturity.
An individual should ask the lender for the APR. Annual Percentage Rate, or APR, is the total cost of borrowing money in a given year, including interest and other fees. You can use the APR to determine how expensive borrowing money is for you. In other words, not only does it reflect the interest rate, but also the fees that you will have to pay in order to obtain the loan. Moreover, one needs to be aware of the penalties attached to the loan. It is important to assess all of the costs associated with any Business Loan before making a decision.
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