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Businesses need ample amount of investment to fund expenditures related to expansion such as adding new lines to their existing products/services. In such a situation, business loans can come in handy as they provide much needed financial assistance to companies so that they can grow more competitive in the chosen markets. Like any other loan, a business loan is a debt which the company is obligated to pay back to the lender within a specific tenure according to the terms and conditions mentioned in the loan agreement. Start-up Business loans can be taken for a variety of essential requirements like starting up a new firm, business expansions, dealer and vendor financing etc.

The major benefit of business loans in India is that it often does not require any collateral and most of the banks sanction business loans with minimal pre-payment charges. Moreover special schemes are currently available including business loans for women, Mudra scheme for smaller businesses as well as small business loans for professionals. Another benefit is that if there is a failure of repaying the loan, then the business owner will not solely face the burden of penalties but the whole company will be liquidated in order to clear the business loan.

  • Business Loans can be availed for as small an amount as Rs.30,000. Larger amounts can be availed depending on various factors including the size of the business, reported profits of the business, existing business liabilities, etc.
  • Business loans in India are offered in a manner similar to personal loans. Therefore, the documentation to avail a business loan is simple and the turnaround time is relatively short.
  • Business Loan tenure can be from 12 months to 48 months. In most cases, the borrower can also avail the benefit of prepayment in lieu of a nominal prepayment charge, which provides additional flexibility to the borrower.
  • Business loan interest rates varies from 17% to 25% which depends on various factors including but not limited to eligibility of the applicant, the size of the business, credit rating/score of applicant, type of business and loan quantum/tenure.

Overdrafts: An overdraft means overdrawing from a current account. In simpler words, an account holder can take out more money than what has been deposited in the account in order to meet business requirements. An agreed rate of interest will be charged if the overdrawn amount is within the limits of a preceding agreement. What’s more, in case, the business does not avail the overdraft facility, no interest charges will be applicable.

Term loans: Currently many types of term loans are available such as short term loan, long term loan as well as intermediate term loans. An entrepreneur can avail these loans according to his/her requirement and economic situation. Usually the minimum tenure for a short term loan is 3 years and for long term loan it is 10-15 years, there will be some variations in applicable interest rates depending upon the loan tenure. In most cases, the lender charges a pre-payment penalty in case the borrower decides to foreclose the loan.

Term loans are divided into two major categories - unsecured business loans and secured business loans. In case of a secured business loan, acceptable collateral or security for availing the loan includes commercial/residential/industry property and machinery. These secured business loans usually feature lower interest rates as compared to an unsecured business loan as they are deemed to be less risky by the bank.

Bill discounting: This process gets the borrower instant cash back on various large purchases and this essentially amounts to discount on the credit sales. All one need to do is to submit the important documents which validate business transactions like invoices, transportation receipts, bill of lading etc.

Letter of credit: A letter of credit is issued by the buyer’s bank which declares that a seller will receive the payment in full when all the terms and conditions regarding sale and delivery have been completed. This situation generally arises in international business finance where seller and buyer are often unknown to each other, therefore the business transactions is done on the basis of bank’s credit worthiness.

The important documents which a seller has to present in order to get the payment on the basis of a letter of credit include:

  • Commercial documents such as invoice and lading bills
  • Transportation documents
  • Insurance certificate
  • Documents such as origin certificate, inspection certificate, legal documents, etc.

Bank Guarantee: A bank guarantee is a unique type of pre-approved secured business loan that can be availed by various business borrowers including SMEs such as public limited companies, private limited companies, partnership firms and proprietorship firms. Usually provided in lieu of collateral, bank guarantees are offered against multiple types of security including commercial, industrial and residential property. Bank guarantee is in effect a promise by the lender that in case the business that has been guaranteed defaults on existing financial commitment to stake holders, the lender will cover the costs. A bank guarantee thus allows a growing business to draw down loans, buy equipment or additional goods on credit.

Special schemes for women entrepreneurs

Nowadays, banks are giving attractive schemes to women entrepreneurs. These exclusive business loans for women provide them relief in terms of interest rates, acceptable loan amounts and applicable collateral. Apart from the business loan itself, some banks also have specialized departments where they provide women entrepreneurs with business consulting, training and counseling along with various avenues for marketing and showcasing their products. They also show them the realistic view of their business by giving references of the similar businesses. Women entrepreneurs whose ownership is less than 50 percent in the company are not allowed to avail the benefits of the women’s special schemes. Some leading examples of such loans include Annapurna, mudra loan for women, etc.


This is a special government-sponsored business loan scheme for small and medium businesses in India including those owned by women. Though the funding is provided through the banking institution, it is the government of India who provides the required cash to the bank. Thus, the bank is able to offer mudra loans at a lower rate as compared to standard business loans in India. This scheme is specifically designed to make business loans for small businesses more affordable and available with ease all over India.

If a business owner needs to apply for a business loan and want a bank to consider their application, then it is necessary to meet the eligibility criteria of the bank. Even though the specific criteria may differ from one lender to another, a majority of the eligibility for unsecured business loans is remarkably similar. In case of secured business loans, the value of the asset used as collateral plays a major role in determining the applicable loan features. In case one meets all the necessary eligibility requirements for a quick business loan, then the chances of loan approval are high. So, before applying for a business loan, the prospective borrower must check the applicable eligibility criteria. The following are some pointers for availing a business loan that one must keep in mind. The following are some key entities that are eligible for business loan:

  • Self-employed businessmen/professionals
  • Limited or private limited firm
  • Manufacturer, retailer or service provider
  • All these entities need to meet the following criteria to avail business loan:

  • The business owner/professional must be aged between 21 years to 65 years
  • The business should have been operational for at least 3 years
  • The business turnover must be at least Rs.50 lakhs per annum with minimum 2 lakhs of profit, however lower amount loans may also be availed as per the lender’s discretion.
  • The business owner/business must submit the last 3 years of ITR statements.
  • A business partner can be a co-applicant in the business loan application. This is in fact recommended as it would increase the probability of getting a loan of higher quantum with longer tenure and interest rate.

The following are some key documents that need to be submitted by an applicant who plans to take a business loan:

  • Last 3 years’ Income Tax statements
  • Bank account statements
  • Business proof
  • Applicable certification related to practice
  • Proof of ownership of the possessions which are used for business purposes
  • Recent photographs of applicants
  • Identity proofs such as Aadhar Card, Voter ID Card, PAN Card, Company registration certificate, etc.
  • Residence proof of applicant
  • KYC documents of the co-applicant (if applicable). In case business loan for women is the category of choice, proof of majority ownership by the woman needs to be provided by the investor.

The quantum of business loan depends on the valuation of the business, annual profits of the business, the industry within which the business operates as well as the number of years of operations. Lenders are also liable to check the cash flows and other aspects of revenue generation. Once the lender has considered the applicable criteria, the business loan application is either accepted or denied. However, the profitability of a business is among the. The main criteria of approving a business loan as it plays the key role in determining how the business will manage to repay the EMIs and various expenses related to the business.

Like any other loan, business loan lenders mainly focus on analysing the credit worthiness of a business by checking the reliability and repayment ability of the business. To perform this analysis, banks generally look at the applicant’s/applying company’s financial history and also all applicable business records.

A start-up might face difficulty in getting a loan because it will be tough for the banks to assign a loan to companies that have a relatively short financial history. In this case, the lender usually grants a personal loan to the applicant, which can then be used to expand/set up the business. In order to grant a business loan to an individual, banks usually examine the individual applicant’s prior financial background, credit history, liabilities, other debts (if any), education and business plan of the applicant. A well planned and researched business plan shows the applicant’s dedication towards their business and the capital that has been invested in the business. These factors are also considered by the bank.

Banks have even started schemes of approving loans on the basis of good credit score/credit rating and repayment record of their existing loans. These factors also tend to affect the business loan interest rate that is applicable to the specific case. Additionally, applicants should also keep in mind that applying for multiple loans can also restrict their ability to take on additional credit as it increases the overall liabilities of the company.

An additional factor to consider is insurance. Having insurance of equipment, buildings, raw material stocks, finished products etc. provides additional financial stability to the company. As banks are always concerned about the security and risk factors attached to a business, some of the banks even insist that the prospective business loan applicants to get insurance before approving their application for business loan especially in case the applicant is a small business.

Therefore a well-planned and professional plan is always important before approaching a bank for a loan. One should be prepared and do a SWOT analysis of the business plan, and have thorough information about the marketplace and a roadmap of how one is going to reach the business targets.

Banks are also going to focus on medium and small business loans and long term capital loans as well as the expansion of credit amenities to new areas such as less developed cities and states in order to promote the comprehensive growth of such small businesses.

The following is a handy checklist of key business loan requirements that one must keep in mind before applying for a quick business loan:

  • The business loan applicant must ideally have perfect repayment history at least for the 5 years prior to applying for the loan.
  • Ensure that the applicant/business applying for the loan meets the eligibility criteria, business loan requirement, etc. Additionally they should also have all the necessary documents ready.
  • Have sufficient funds ready, in case the lender needs the applicant to fund the down payment for the new equipment/building/office premises.
  • When applying for a business loan, the applicant must maintain a complete record of the company’s financial situation and past performance along with its overall cash flow statement.
  • When applying for new business loan, the applicant must focus on the ideas and presentation while also ensuring that the overall expectations are realistic in nature.

Setting up a new business or stepping up the operations of an existing business is highly ambitious and it needs a lot of effort as well as planning to keep going in this competitive world. With the above checklist, small and large businesses/entrepreneurs alike will be able to find the right direction to acquiring the necessary funding for the business.

Business Loan
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