Why Business Loans?
Today’s complex business situations demand quick and strategic decisions when it comes to managing business funds. Business owners may grab the market opportunity, provided they can be supported for appropriate funds in the need of an hour.
Before applying for a business loan, businessmen look for quick access to funds, minimal paperwork, flexible repayment terms and affordable interest rate. Since every business is different, the type, terms and conditions for the loans across the businesses vary widely.
Types of Business Loan
The banks offer business loan under various forms, according to the suitability of a businessman. Some of the most popular business loans are Loan Against Property (LAP), Unsecured Loans, Working Capital Loans, Capital Purchase Loans, Expansion Loans, E-commerce loans, Loans against POS machine and many others.
Loan Against Property (LAP)
Most banks provide loans against immovable assets like office, home or factory. The LTV (Loan-to-Value) Ratio depends on various factors such as whether the property is vacant or occupied, residential or commercial, etc. When applying for LAP, your lender generally asks ownership documents and valuation report of the property. The businessman can also choose the OD (Overdraft) account facility or regular loan option under this type of loan.
Under the OD option, the bank opens a current account with Overdraft (OD) facility in the favor of the borrower. The borrower has the freedom to use the amount as per his/her financial need. The interest is chargeable according to amount and days it was used. When the money is available with the borrower, he/she can re-deposit the same into the Overdraft account. The interest is payable monthly in the OD account by the way of deposit of cheque or electronic transfer.
With the standard loan, you can use the entire loan amount at once and repay it in EMI (Equated Monthly Installments). The loan is generally repayable in three to five years tenures.
An unsecured loan does not require any security or collateral. It is granted based on the financial statements of your business. Moreover, banks may ask personal financial documents like income tax returns, bank statement and other similar documents. The interest rate is 1 to 2 percent higher than a secured loan. This loan must only be used when it is not feasible for your business to take a secured loan.
Working Capital Loan
Your business may need funds to procure additional raw material and labour charges when it receives a large order. However, the customer may pay only after successful order execution. To bridge the gap between order processing and customer payment time, the bank may give you the loan, which is called the working capital loan. Such a loan is linked to the purchase order from your customer or any other suitable documents. You can repay the loan as soon as you receive the payment against an order from your customer. You can also roll over the loan if you get new orders and re-pay earlier loan satisfactorily.
For your short-term fund requirement, the banks and other financial institutions can sanction the loan against invoice raised on your firm. Usually, the invoice should be from a reputed corporate house. The purchased items should be used for further processing of your customers’ orders. In some cases, the bank may ask you to submit relevant purchase orders or other documents from your customer.
Loans for Capital Goods/Industrial Equipment
When the business expands, it needs additional capacity to execute new orders. Such capacity may be in the form of additional land, plant and machinery, a fleet of vehicles or similar other expenses. Banks give business loan for such one-time purchases which need huge capital. The repayment can be made by EMI. The assets purchased using such a loan is hypothecated to the bank. The hypothecation provides security to the bank. Hence it enables banks to lend funds at a reasonable interest rate.
Business Loan for Professionals
The professionals like Doctors, CAs and architects can avail secured and unsecured business loans. Usually, as compared to another type of business loan, such a loan comes with lower interest, higher tenure and flexibility of repayment. Based on professional services rendered and business vintage, the higher loan amount can be sanctioned.
Loan Against POS (Point of Sales) Terminal
This loan is very useful for owners of retail outlets, restaurants, hotels, hospitals and similar other shopping establishments. The loan is sanctioned against average monthly transactions processed on your EDC or POS machine. The most convenient feature of this loan is, that it requires minimum documentation. In addition to this, you do not need to submit your financial statements or stock statements, thus making the entire loan process easier and faster.
Loans for E-commerce Business
Selling your products on E-commerce platforms like Flipkart or Amazon? If you are looking for any financial help, good news is waiting for you. Many financial institutions are happy to fund you based on your last six months’ transactions. You will be asked for minimum documentation and will be given the flexibility to repay your loan. Some banks might even allow you to repay on a weekly basis, to keep your finances in control. However, you can select other tenures as well such as monthly, bi-monthly or quarterly installments. As far as the loan amount is concerned, it will be decided on the basis of your e-commerce transactions and credit profile.
Line of Credit
Based on your business vintage and size of operations, banks offer you an open credit line. You can use the credit as per your business needs without any commitment to utilize any specific amount or period. If your business is seasonal in nature or subjected to large fluctuations in volume, it is recommended to avail open credit line from your regular banker. You can use the same if you need higher fund on an urgent basis and repay the same when you have an excess fund available. You will be charged only for the amount and days you utilized from the bank. This facility also saves your paperwork by applying and repaying loans very frequently.
Eligibility Criteria for Business Loan
Each bank and NBFC has its own criteria for extending business loan to their customers. Some of the basic eligibility criteria that an applicant must meet to avail business loan are listed as follows:
- The applicant should have a valid registration of business
- The business must exist for three years or more
- The yearly turnover required is usually of Rs. 50 lakhs and above; but it varies from one lender to another
Applying Business Loan Online
Most banks and financial institutions nowadays provide online facilities to apply for a business loan. Usually, you have to fill up a business loan form on the lender’s website, mentioning your basic details like name, phone number and a short description of your business. Upon successful submission of the form, an executive from the bank calls you back for detailed documentation and process for a suitable business loan.
Amount of Business Loan
The amount of business loan depends on many factors. In broader terms, your size of business and vintage of the business decide your creditworthiness to ascertain the loan amount.
Accurate financial reports, timely income tax, and other returns and past payment history indicate your financial discipline and repayment capacity. The business owner or promoter’s creditworthiness is also evaluated while sanctioning the business loan.
Usually, a business loan is granted without collaterals. If you want to enhance the loan amount, you can offer collateral such immovable properties to the bank. The collateral may also help in reducing the rate of interest applicable on your loan.
Apart from the above factors, if you have a large existing loan outstanding, the bank may not feel comfortable to extend you fresh credit. You may be denied the loan or the loan amount may be substantially reduced as your repayment capacity might become a concern for the bank. If any of your past loans is not paid or paid irregularly, it may harm your creditworthiness. Consider repayment with utmost priority once you avail the business loan.
Interest Rate of Business Loan
The interest rate of business loan varies widely. It could be as low as 13% and as high as 20%. The governing factors of the business loan are individual profile, financial institution, nature of the loan, co-laterals provided and financial statements.
The credit score of the business owner is the most important factor to ascertain the amount and interest rate of the business loan. A score above 750 makes you trustworthy in terms of repayments and hence, you may be offered lower rates of interest.
Your bank statements, Profit and Loss Account and Balance Sheet speaks a lot about your business practices. The history of reasonable debt and its regular repayment enhances your creditworthiness, and the bank feels more comfortable to lend you money at a lower rate of interest.
Nature of Loan
A secured loan like a loan against property (LAP) carries lower risk as compared to unsecured loans like vendor financing. The loans of short-term nature also carry a higher rate of interest. As far as possible, you should opt for a long-term loan with regular repayment and avoid frequent, inconsistent loans.
Collaterals reduce the risk of losing money for the bank. Hence, you can offer collateral such as office, house, factory or similar immovable assets, to reduce the interest rate of the business loan that you want to avail.