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Business Loan

What is a Business Loan?

A business loan or a commercial loan is a financial product offered by banks and other institutions to cater for the capital requirements of a business. It helps organisations to grow and expand in various business aspects. Lenders like NBFCs (non-banking financial institutions), credit unions, and other financial institutions also offer business loans. Like any other loan, the lender would provide a certain amount based on the business’s eligibility, and the borrower would repay it (principal+interest) in easy monthly instalments (EMIs) in a pre-agreed fixed period of time (tenure).

Business Loan

Types of Business Loans

Secured Business Loans

  • Secured business loans are offered against collateral like company-owned land, property, equipment, commercial property or on a personal guarantee.
  • Typically offered for start-ups and small and medium businesses to cater to their growing needs.
  • Secured business loans can be used for working capital requirements, business expansion, machinery purchases, infrastructure development, etc.
  • Eligible businesses for secured loans include SMEs, MSMEs, proprietorship & partnership firms, limited liability companies, and private or closely held companies.
  • The secured business loan amount ranges from Rs.2 lakh to Rs.50 lakh.
  • Offered at longer tenures and lower interest rates

Unsecured Business Loans

  • Also called collateral-free loans
  • Lenders do not require security or personal guarantees to issue unsecured business loans.
  • These loans are provided based on the borrower’s creditworthiness and repayment ability.
  • Typically issued to start a new business, to expand existing business, machinery or infrastructure upgrades, working capital requirements, etc.
  • SMEs, MSMEs, Private limited firms, partnership firms, LLP, and sole proprietors who meet the criteria are also eligible for the loans.
  • Attract high-interest rate of interest due to no security
  • Faster approval
  • Defaulting on unsecured loans would badly affect the credit score

Working Capital Loan

  • Working Capital loans are provided for the regular operational needs and short-term financial obligations of a business.
  • It can be available as both secured and unsecured loans.
  • Typically used to buy stocks, raw materials purchases, pay staff salaries or rent, daily expenses, inventory management, and other short-term needs.
  • Not meant for business expansions or asset purchases
  • Typically issued with a short repayment tenure – 3 to 48 months.
  • For secured working capital loans – business-owned property, securities, gold, investments or the business itself can be considered as collateral.
  • For unsecured working capital loans – lender’s financial statements, credit score,  tax returns, and business turnover are taken into account
  • Eligible business types include self-employed, private or public companies, partnership firms, MSMEs, self-employed professionals or non-professionals.
  • Different types of working capital loans are available, including Overdraft Facility or Cash Credit, Term Loans, Accounts Receivable Loans, Post Shipment Finance, Bank Guarantee Loans, etc.

Term Loan Facility

  • A term loan is a commercial business loan with a fixed repayment schedule and interest rate.
  • Both secured and collateral-free term loans are available
  • A flat interest rate will be charged throughout the tenure
  • Higher tenures attract lower interest rates
  • Generally used for large capital expenditures
  • Interest is a tax-deductible expense
  • Term loan amount typically varies from Rs.50,000 to Rs. 2 Crore
  • Tenure up to 7 years

Over Draft (OD) Facility

  • Also called Cash Credit Limit Facility
  • Not like a regular business loan
  • Issued only to current accountholders of the bank
  • An overdraft facility allows businesses to use funds up to a prescribed limit.
  • Banks offer a prespecified amount for the OD facility up to Rs.10 lakhs.
  • The eligibility to apply for an OD depends upon the borrower’s repayment history, account value, banking relationship, credit score, and other factors.
  • Businesses can withdraw the required funds and pay interest only on the utilised amount.
  • Suitable for short-term business goals and business emergencies
  • Interest rates are calculated on a daily or monthly basis
  • Repayments can be made by simply depositing the amount in the borrower’s current account
  • The repayment tenure is typically 3-12 months. Borrowers can repay the principal amount at any time within the tenure, but the interest must be paid monthly.
  • The OD facility attracts an annual fee, processing fee and others based on the bank’s terms

Government-backed Loans

The Indian government has launched various credit schemes to encourage MSMEs. Some schemes include Pradhan Mantri MUDRA Yojana (PMMY), Stand-up India, Credit Guarantee Schemes (CGS), etc.

Features and Benefits of A Business Loan

  • High loan amounts
  • Flexible tenures
  • Minimal documentation
  • Faster disbursals
  • No collateral
  • Easy repayment options
  • Competitive interest rates
  • Online application process

Benefits offered by Business Loans

  • Easily accessible
  • Flexibility to use
  • Tax benefits
  • Convenient repayment
  • Helps in business growth & expansion
  • Helps in building your credit score

FAQs on Business Loan

When should I consider taking a business loan?

  • To start a new business
  • To expand existing business 
  • To procure the latest equipment or machinery
  • To meet short-term financial needs
  • For emergency expenses

Which businesses can apply for a business loan?

  • Self-employed professionals and non-professionals
  • Proprietorship firms
  • Partnership firms
  • Limited liability firms
  • Private limited companies
  • Closely held limited companies

What is the age bracket to apply for a business loan?

Applicants must be between 21 to 65 years of age to apply for a business loan.

What type of collateral is required for a secured business loan?

  • Any physical property owned by the borrower or the company
  • Personal investment instruments, including mutual funds, stocks, gold bonds, etc
  • Large machinery and equipment
  • Gold

What is the maximum tenure of a business loan?

The tenure of business loans varies from 3 years to 72 months.

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