Business Loan

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. These loans are perfect for small businesses in India. There are two types of small business loans in india:

• 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.

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 small business loan in India

• 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 small Business Loans in india

• 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 small Business Loans in india

• 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 small 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.