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What is a Business Loan?

A business loan is one type of a loan that is applied for by people who aim to establish, expand or buy equipment for their businesses. Entrepreneurs who look for capital to begin their businesses also apply for business loans. There are two types of business loans:

  • Secured Business Loans:
  • A secured business loan is when the individual provides collateral in the form of land, machinery, a house, etc, as security for the loan amount. This has the added benefit of a lower rate of interest.

  • Unsecured Business Loans:
  • An unsecured business loan is when the loan amount is given without any collateral. The interest rates for unsecured loans are generally higher as there is a risk factor involved for the lender.

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Features and benefits of a Business Loan

  • Good loan amounts
  • Business loan amounts can go up to Rs.5 crores or more based on the needs and requirements of the customer. The loan amount is generally given based on the size of the business and the amount needed for operations such as expansion, inventory, working capital and more.

  • Flexible tenures
  • Business loans have tenures that can extend up to 7 years based on the customer’s requirements.

  • Minimal documentation
  • Most business loans have a very simple loan process that requires minimal documentation from the customer. Some lenders offer doorstep services to collect the few documents that are required so make the process more convenient for the customer.

  • Speedy disbursal
  • Most lenders who provide business loans ensure that the loan amount is in your bank account in 3 working days or sooner. In some cases, it can take longer due to verification of documents and other formalities that are followed.

Interest rates

The interest rates for a business loan generally begin at just 12%. Most interest rates are fixed at the sole discretion of the lender and can vary based on credit scores, current performance of the business and other factors.

Factors that affect interest rates for a business loan

  • Credit score:
  • A credit score is a three-digit number that ranges from 300 to 900. It shows your creditworthiness to your lender. Lenders use your credit score to assess your reliability. If you have a good credit score, then the interest rates for your business loan will be much lower. A credit score of 750 and above are considered a good score by most lenders. So, if you have a low credit score, then your lender will consider you to be a risky customer and will increase the interest rate for the loan or reject your loan application. Always ensure that you check your credit score before applying for a business loan.

  • Credit history:
  • If you have a long credit history that is good, then the interest rates that you will receive from your lender for your business loan will be low. This is because your lender will view your past transactions with your past credit products to check your creditworthiness. If you have a positive and long credit history, the banks will consider you to be reliable and will lend to you at lower interest rates. If you have a bad credit history, the interest rates will be higher as you will be viewed as a risky customer.

  • Loan amount:
  • A large business loan amount entails a lower interest rate than a small business loan amount. So, it is better to take a large loan for your business rather than a small loan as the interest rates will vary as per the loan amount that is taken by the customer. Ensure you calculate all the needs and requirements of your business including the cost for labour, equipment, inventory and other costs.

  • Relationship with lender:
  • If you have a good and healthy relationship with the lender you are borrowing from and are an existing customer with them, then the interest rates can be negotiated for and one can get a lower interest rate. This can help you lower the interest rates on your business loan. Most lenders aim to please their customers and so they can lower the interest rates if you have a positive and long-term relationship with them.

Eligibility criteria for Business Loans

  • Should be a self-employed individual, Proprietor, Private Ltd. Co or a Partnership Firm that is involved in the business of manufacturing, trading or services
  • Should have a minimum of 2 to 3 years of business experience in the current business
  • Should have a minimum turnover of Rs. 24 lakhs
  • The applicant should be a minimum of 21 years and a maximum of 65 years.

These criteria can vary from lender to lender and so it is best to check with your lender as to what their eligibility criteria are for their short-term loans.

Documents needed for Business Loans

  • PAN card of the individual or the company or the firm
  • ID proof (Aadhar card/passport/Voter’s ID/PAN Card/Driving license)
  • Address proof (Aadhar card/passport/ Voter’s ID/ Rent agreement/Driving license)
  • 6 months bank statement
  • Latest ITR with computation of income, balance sheet and profit and loss account for the last 2 years after being audited
  • Proof of continuation of business

These documents needed can vary from lender to lender and so it is best to check with your lender as to what documents are required for their short-term loans.

How to apply for a Business Loan

  • You can apply online by filling in the application form and turning in all the required documents.
  • You can apply in person by visiting the lender’s branch with all the needed documents and filling out the application form for the same.

Business loan – FAQs

1. What are the two types of business loans?

There are two types of business loans – secured and unsecured. A secured business loan is when the individual provides collateral as security for the loan amount. An unsecured business loan is when the loan amount is given without any collateral.

2. What is the tenure for a business loan?

Business loans have tenures that can extend up to 7 years.

3. What are the usages of business loans?

Business loans are applied for by people who aim to establish, expand or buy equipment for their businesses. Entrepreneurs who look for capital to begin their businesses also apply for business loans.

4. What is the minimum and maximum age for applying for a business loan?

The applicant should be a minimum of 21 years and a maximum of 65 years.

News

Edelweiss NBFC to Exit Wholesale Loans12 Jul 2020

Edelweiss Finance Ltd, the non-bank subsidiary of Edelweiss Financial Services Ltd has released a statement stating that they would sell its wholesale book loan within 2 years. The parent company will shift the focus only on retail lending, but will ...

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Edelweiss Finance Ltd, the non-bank subsidiary of Edelweiss Financial Services Ltd has released a statement stating that they would sell its wholesale book loan within 2 years. The parent company will shift the focus only on retail lending, but will continue extending wholesale loans through their separate AMC (Asset Management Company). The company executive said on their earnings call on Monday (6th July 2020) that they had a total loan book of Rs.19,100 Crores. At the end of the March quarter, the company’s outstanding loans stood at Rs. 10,000 crores which was 43% down, from a year ago. Rashesh Shah, Chairman and CEO of the Edelweiss Group stated that they aimed to bring wholesale loans down to 0 by 2022. He also mentioned that they would continue disbursing loans in their AMC business which had assets under management for Rs. 21,000 crores. He also stated his reason for the shift was the fact a lot of projects and construction businesses have a lot of uncertainties regarding their cash flow. If done in the fund format than take ALM (Asset Liability Mismatch) risk and NPA (Non-Performing Assets) issues would be out of the way. Edelweiss reported its first loss in 25 years - a loss of Rs.2,245 crores in the March quarter on Friday, after making additional provisions of Rs.900 crores towards loan losses due to the COVID-19 pandemic, taking the total provisions to Rs.2,549 Crores at the end of March 2020. Shah said the NBFC business is looking to shift to a capital-light model by collaborating with banks through co-lending, on-lending and securitization. In a co-lending model, the NBFC takes 20% of the credit risk by way of direct exposure, with the balance being taken by banks.

Govt. to Private Lenders: Step up lending to Small Businesses12 Jul 2020

The Finance Ministry has encouraged private banks and NBFCs to step up loan approvals and disbursals to small businesses. This announcement comes after recent statistics from the finance ministry showed that private lenders with the exception of HDFC...

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The Finance Ministry has encouraged private banks and NBFCs to step up loan approvals and disbursals to small businesses. This announcement comes after recent statistics from the finance ministry showed that private lenders with the exception of HDFC Bank has slowed down on loan approvals and disbursals to small businesses. Annually, private sector lenders sanction loans worth up to Rs. 48,000 crores. Of this amount, around Rs.28,000 crores is sanctioned by the country’s largest private lenders. The government has instructed both ICICI and AXIS Bank to take up the scheme more aggressively. HDFC Bank, one of the biggest private banks in the country has disbursed loans worth Rs.8000 crores so far this year. Latest data from the Finance Ministry shows that the private banks have so far sanctioned top-up loans to small businesses loans of around Rs. 1.14 lakh crores along with private sector share at around 42.5%which is higher than 2019’s 36% share that they had in the credit. NBFC’s and private sectors have seen to have a higher share of the pie. Though the private sector’s share is higher, public sector bank s have shown to fare better in terms of disbursements. “Public sector banks were off the block early and have been moving as per our expectations. But the private sector banks including NBFC’s have been a little off on their expected pace and have been asked to pick up the pace” quotes a senior official from the Finance Ministry. Among the public sector banks, SBI Bank is far ahead of its competition accounting for Rs.20,628 crores or over 31% of the overall loans sanctioned by the public sector. In terms of disbursals, SBI Bank stands at 37% compared to other state-run players. As part of the Covid-19 relief package, emergency credit line guarantee scheme launched by the govt. covers the risk of defaulters for additional 20% loans to businesses with an annual turnover of Rs. 100 crores and an outstanding debt of Rs. 25 crores. The govt is hoping to sanction loans up to Rs. 3 lakh crores.

Google to offer credit to merchants in India through Google Pay app29 Jun 2020

Google is planning to provide loans through the Google Pay app, starting later this year. This was to help small businesses in the country to get through the pandemic. The company has stated that it is working with financial institutions to offer loa...

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Google is planning to provide loans through the Google Pay app, starting later this year. This was to help small businesses in the country to get through the pandemic. The company has stated that it is working with financial institutions to offer loans to merchants from within Google Pay. Google Pay has a business app that was launched last year. Google’s announcement was made as a part of its effort to share its broader initiatives for small businesses in India.

6 crore MSMEs in India need immediate relief on loans29 Jun 2020

MSMEs need immediate relief ranging from short-term liquidity to simple compliance for the economy to come out stronger. More than one third of the small scale businesses could see extinction if they do not have access to loans or a kind of support f...

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MSMEs need immediate relief ranging from short-term liquidity to simple compliance for the economy to come out stronger. More than one third of the small scale businesses could see extinction if they do not have access to loans or a kind of support from government bodies. The MSME sector contributes to nearly 25% of the services GDP and 33% of the manufacturing output. This sector needs to be communicated about the schemes of the stimulus package to be released and norms should be relaxed so that borrowers can repay loans in a longer timeframe and allow exemption from bank guarantees.

Haryana government starts website that lets people apply for collateral free loans24 Jun 2020

Haryana Chief Minister Manohar Lal Khattar launched a web portal for potential borrowers to make use of the ‘Haryana Interest Waiver Scheme’. The chief minister stated that the portal would help people of the state to take loans without collateral an...

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Haryana Chief Minister Manohar Lal Khattar launched a web portal for potential borrowers to make use of the ‘Haryana Interest Waiver Scheme’. The chief minister stated that the portal would help people of the state to take loans without collateral and that the state government will bear 2% interest rate. Three types of loans can be availed from this portal: Differential Rate of Interest scheme (DRI) loan, Shishu loan (MUDRA scheme) and education loan. Through the Shishu Loan (Mudra scheme), any person wanting to start a new business can get a loan of up to Rs. 50,000 without any collateral.

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