Whether you have a running business or you are starting a business, you need to have enough amount of capital so that the business can run smoothly and the things can be done in a hassle free manner. You may require a Business Loan for running your business easily.
Indian Government has already come up with variety of business loan schemes and various programs to encourage entrepreneurs to start new business as the growth of business ultimately contributes a lot to the growth of economy. Under this, many types of different schemes are offered by public sector banks to give these types of business loans to small and medium enterprises (SMEs) such as Credit Guarantee Fund Scheme for Micro and Small Enterprises, Market Development Assistance Scheme for MSMEs, Mini Tool Room and Training Centre Scheme, Credit Link Capital Subsidy Scheme for Technology Upgradation, etc.
What is a Business Loan?
A Business Loan is a loan which is specifically extended for business purposes. It may be obtained from a bank and can be either secured or unsecured. For secured loans, banks will require collateral as a security for that loan. Hence, the borrower pledges an asset such as plant, equipment, stock or vehicles for availing a secured loan which may be used, if loan is not repaid by the borrower in due course. Unsecured Loan is not backed by any security though the bank (lender) will have a general claim on the borrower's assets, in case repayment is not made by the borrower in time.
Business Loan is a borrowed capital and the business needs to pay a regular interest and repay the whole principal at the end of the loan period.
Reasons of Applying for a Business Loan
- Start a new Business
- To buy Plant and Machinery for your Business
- Renting or buying a place for your Business
To hire new people- For Business Expansion
- Purchase of Inventories
- Need of Equipments for Business
- New Business Opportunity
- Working Capital Requirement
- Improving Services and new technology for Business
- To pay for salaries and wages to current employees
- Transfer your existing Business Loan due to lower interest rate offered by target bank
Features of Business Loan
- Lenders charge interest on loan, which may be fixed or floating
- Lenders generally ask for a collateral/ security against Business Loan
- Some Banks also require a Guarantor
- Multiple repayment options are available
- Online Application Facility is also provided by most of the lenders
- Banks check your loan eligibility before approval of business loan
Benefits of Business Loan
- Quick approval is available now-a-day
- It is obtained through a hassle-free process
- Customer Oriented Services are provided by the banks
- Business Loan is available on an Attractive Interest Rates
- Banks also provide flexible Business Solutions
- No hidden charges are involved
- Easy documentation
- Flexible tenure options
- Various repayment options
- Availability of long Repayment Period
Types of Business Loan
Business Loan- On the basis of Tenure
Broadly, Business Loan has been divided into following 2 categories:
Working Capital Business Loan: It is provided for running daily operations of a business smoothly. It is generally given for shorter term.
Term Business Loan: It is provided for the growth and expansion of business. It is comparatively for longer term.
Business Loan- On the basis of Security
Broadly, Business Loan has been divided into following 2 categories:
(1) Secured Business Loan: This loan is backed by collateral. This loan is available at comparatively low interest rate, as the bank can sell the collateral in case of any default by the borrower.
(2) Unsecured Business Loan This loan is not backed by any collateral. This loan is available at comparatively high interest rate to the borrowers.
What Things a Bank (Lender) Can Ask Before Approving a Business Loan?
- Detailed Business Plan
- Purpose of Getting Loan
- Financial Details of the Business
- Audited financial statements for last 3 years.
- Copy of Income Tax Return (ITR) pertaining to a period of last 3 years.
- Insurance information
- Collateral in case of Secured Loan
- Shops and Establishment certificate
- Excise / Sales Tax registration certificate
- MSE registration certificate, if applicable
- Last one year current account statement
Which Factors Affect Eligibility for a Business Loan?
- Age of Business
- Loan Repayment Track Record
- Financials of your Business Entity including its Earnings
- Credit Score/ Credit Performance Update
- Debt Service ability of the Borrower
- Financial Ratios of the Entity
- Existing Relationship with the Bank
- Cash flows of the Business
What items does a Business Loan Application Form Cover?
The Business Loan Application Form is to be filled up and submitted to get a business loan. The form requires the details of following items:
- Name of the Entity
- Registered Address of the Entity
- Nature of Business
- Date of Incorporation of the Entity (Sole Proprietorship, Partnership Firm, Private Limited Company, Public Limited Company)
- Name of Proprietors/ Partners/ Promoters
- Credit Facilities ( for both existing and applied for)
- Details of Collateral/ Security (in case of Secured Loan)
Definition of Micro, Small & Medium Enterprises:
The Micro, Small and Medium Enterprises in Manufacturing and service sector are defined as under in MSMED ACT, 2006
| Enterprises* | Units engaged in manufacturing/ processing of Goods | Units engaged in providing/rendering of Services |
|---|
| Micro Enterprise | Investment in plant and machinery not exceeding Rs.25 lakhs. | Investment in equipment not exceeding Rs.10 lakhs. |
| Small Enterprise | Investment in plant and machinery exceeding Rs.25 lakhs but not exceeding Rs.5 Crores. | Investment in equipment exceeding Rs.10 lakhs nut not exceeding Rs.2 Crores |
| Medium Enterprise | Investment in plant and machinery exceeding Rs. 5 Crores but not exceeding Rs.10 Crores. | Investment in equipment exceeding Rs. 2 Crores nut not exceeding Rs.5 Crores |
Manufacturing Enterprises i.e. enterprises engaged in the manufacture or production, processing or preservations of goods with investment in Plant & Machinery as stated above.
Service Enterprises i.e. Enterprises engaged in providing or rendering services and whose investment in equipment as specified above. (Original cost excluding Land & Building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006).
Loans for food and agro processing will be classified under Micro and Small Enterprises, provided the units satisfy investments criteria prescribed for Micro and Small Enterprises, as provided in MSMED Act, 2006.
*All individual/s, firms/ company /LLP, etc.
5 Tips to Get Business Loan Approval with Ease
- Business Plan should be presented very well which should clearly state as to why you need the loan and it should also cover minute but important details about the business.
- Existing Relationship with the lender may increase your chances of getting fast loan approval with ease.
- Continuity of Business is a very important issue. It shows your seriousness towards your business and its growth.
- Good Credit History is definitely a very strong aspect of getting business loan approval. If you carry good credit history and have repaid all the loans in the past well in time then the lender will not mind extending you a business loan on favourable terms.
- A considerable amount of paperwork should be done well before applying for a business loan. All the documents required for business loan should be ready with you while applying for the loan.