What is a Business Loan?
Any person wanting to start a business or any individual wanting to expand their business need funds to do so. This is where individuals and entrepreneurs take loans at a previously agreed rate of interest and time. Without this working capital businesses cannot run smoothly. There are 2 types of business loans
1. Secured loans – This is the case where individuals and entrepreneurs provide collateral like inventory, land, machinery etc. Here the interest rate will be less
2. Unsecured loans/Small business loans – This is the case where businesses take a loan without any collateral. The interest rates are highas the risk for the banks are high
Business Loan Eligibility
- Self-employed individuals, Proprietors, Private Ltd. Co. and Partnership Firms involved in the business of Manufacturing, Trading or Services.
- Individuals who have been in the current business for a minimum of 3 years, with at least 5 years total business experience.
- Those whose business has been profit making for the previous 2 years
- The applicant should be at least 21 years at the time of applying for the loan, and should be no older than 65 years at the time of loan maturity
|Loan Amount||Rs. 50,000/- to Rs.50,00,000/-|
|Tenure||Minimum of 12 months to Maximum of 120 months|
|Business Loan Interest Rate||10% to 21%|
|Loan Processing Charges||Up to 2.50% of the loan amount subject to a minimum of Rs. 1,000/- & Maximum of Rs. 75000/-|
|Prepayment||No pre-payment permitted until repayment of 6 EMIs|
|Pre-payment charges||Up to 4% on the balance|
|Charges for late payment of EMI||Up to 3% per annum on EMI / Principal overdue|
Documents Required for Business Loans
The following documents are required along with your Business Loan application:
- PAN Card – For Company/Firm/Individual
- A copy of any of the following documents as identity proof:
- Aadhaar Card
- Voter’s ID Card
- PAN Card
- Driving License
- A copy of any of the following documents as address proof:
- Aadhaar Card
- Voter’s ID Card
- Driving License
- Bank statement of the previous 6 months
- Latest ITR along with computation of income, Balance Sheet and Profit & Loss account for the previous 2 years, after being CA Certified/Audited
- Proof of continuation (ITR/Trade license/Establishment/Sales Tax Certificate)
- Other Mandatory Documents [Sole Prop. Declaration or Certified Copy of Partnership Deed, Certified true copy of Memorandum & Articles of Association (certified by Director) & Board resolution (Original)]
Repayment of Business Loan
Your business loan can be repaid in following three ways.
Standing Instruction (SI): Standing instructions is a good way to pay your EMI if you are an existing account holder at the lender bank. Your EMI amount will be debited automatically at the end of the monthly cycle from the bank account you specify. It is simple, and you do not need to remember each month about paying the loan manually.
Electronic Clearing Service (ECS): In case you do not have an account at the lender bank you can opt for Electronic Clearing Service (ECS), where you give the lender bank permission to directly withdraw money automatically, each month from your specified other bank account.
Post-Dated Cheques (PDCs): Postdated cheques can be submitted to the lender bank for the duration of the tenure, which the bank will deposit each month on the date specified by you. Most banks make this facility available only in areas where the ECS or SI facilities are not available. This method also has the drawback where the bank might lose the cheques as the duration or tenure is long.
Purpose of Business Loans
The most common reasons to take business loans are as follows
1. Expanding OperationsBuying land or leasing a property to expand business operations when you feel that your business has grown large enough and scaling up at this moment is an opportunity that you do not wish to forgo, a business based on its growth projections can go for expanding operations more than once.
2. Purchase EquipmentTechnology has become a key driver in the information age of business, and since technology comes with a pre-set expiry date, there is always a demand to purchase or upgrade existing equipment and technology. Buying/leasing/replacing a new equipment that will help improve the production or operations of the organization, alternatively the equipment can also be leased, it is best to conduct a cost-profit analysis to determine whether to buy or lease. The advantage with buying equipment is that depreciation can be claimed each year apart from the first-year tax exemptions.
3. Purchase of inventoryMost often small business would require immediate capital for the purchase of inventory stock or raw material. There may arise the situation where the demand for your product may be very high in the market. Businesses may not have the funds to get the raw materials to meet the rise in demand. This problem can be solved when individuals and entrepreneurs take loans to buy the inventory needed for production.
4. To increase working capitalMany times, small businesses and entrepreneurs may not have enough working capitals to run their day to day activities. They will take short term loans till their own assets earn enough revenues to meet their operational needs.
5. Improve credit historyIf a business is looking to get a larger loan it is necessary for the company to have a good credit history. To make sure of this the individual or proprietors get short term loans and pay them on time to improve their vidhifinancial history. Consistent repayment of borrowings will lead to a positive credit history.
How to get the best Interest rate on Business Loan?
For any business loan the tenure and interest rate are very important for the borrower. It is based on this that they will decide whether to go for the loan or not. As the amount required in business loans are usually high the rules and criteria for approval of business loans are also stricter.
Factors that affect the interest rate business loan
The business loan can be offered to any person who is running a legitimate business and has good turnover. Different banks have different criteria and terms to validate and authenticate a person’s business. After all the evaluation the loan amount, tenure and rate of interest or even whether to provide loan falls under the purview and authority of the bank. Some of the parameters taken under consideration are
- Credit score of the company or in the case of a new business the owner/s
- Type of business: Proprietorship, Partnership, Private Limited or Public Limited
- Turnover of the business
- Profit made by the business
- Cash flow of the business
- Track record of business
Comparing the loans
When taking a business loan, it should not just be the fact that you are taking a business loan because there is a shortage of funds, a proper analysis must be done to make the loan taken justifiable and only then can the funds be utilized effectively. The following are the factors to be considered when taking a business loan.
- The requirement of the business – Why do you need the business loan for, what is the money going to be used for, do you not have any other options other than a loan, Strategic or Tactical business needs and decisions – All these questions need to be answered before applying a loan
- The loan amounts – What is the loan amount you need – know the spread i.e. where exactly the money is going to be spent
- The interest rates – There are 2 types of interest rates when it comes to business loans
a) Diminishing Rate of interest –
- This is where each month when you pay the EMI, which contains both Principle and Interest, the interest calculated the next month will only be on the remaining Principle borrowed. Thus, each moth the EMI paid will be lesser.
b) Flat Rate of interest –
- Here the interest will be on the original principle borrowed which means that each month the EMI will be the same and the interest paid will be more.
- Processing fee – Make sure the processing fee charged is less
- Prepayment charges – Prepayment is where a company pays the loan dues well before the tenure ends. Make sure there are nil or very less prepayment charges
Business Loans for Women Entrepreneurs
To encourage women, increase the number of women entrepreneurs and bring out the best from organisations such as the women Self Help Groups, the government has come up with various schemes that are aimed at helping women better their business. The schemes have had a positive effect and has resulted in an increase of number of women owned businesses.