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).
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
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
Applicants must be between 21 to 65 years of age to apply for a business loan. The tenure of business loans varies from 3 years to 72 months.
When should I consider taking a business loan?
Which businesses can apply for a business loan?
What is the age bracket to apply for a business loan?
What type of collateral is required for a secured business loan?
What is the maximum tenure of a business loan?
Applicants must be between 21 to 65 years of age to apply for a business loan.
The tenure of business loans varies from 3 years to 72 months.