All About Business Loan

A business loan is a special kind of loan which you take to finance some business need. The loan can be taken to finance any aspect of the business such as to buy a new machinery, or to implement a new business solution. Business loans are given out at attractive rates of interest without the need to pledge any asset.

What is Business Loan?

A business loan is an unsecured fiscal loan which you can get from a NBFC body or a bank. They are given out to solve immediate business requirements in the form of term loans and flexi loans. Another name for business loans is commercial loans. The loans are given out to all business sizes including retailers, entrepreneurs, partnership establishments, private enterprises, and sole proprietorship.

Different Types of Business Loans

There are two types of business loans- term loans and flexi loans.

Term loans: They are both long-term and short-term and can range from 5 to 20years. The borrower has to repay the loan on an EMI (Equal Monthly Instalments) basis all through the loan duration to repay the loan.

Flexi Loan: Here you just have to pay the interest amount through the EMIs, while the principal amount is repaid at the end of the loan duration. In fact, if you have utilized just a small part of your loan then you have the flexibility to pay an interest just on that specific loan value and not the total borrowed amount. This way you can bring down your EMIs to 45 percent in comparison to the regular term loans.

Listed below are the various business loans which you can avail as per your requirement.

1. Working Capital Loans: Business houses require a sufficient and regular cash flow to maintain a decent short-duration liquidity. The working capital loan takes care of this business need and extends loan for short duration corporal requirements such as payroll costs, or inventory. Here you can get a loan amount up to Rs. 20 lakhs. 

2. Business Loans for Women: This loan is especially for women entrepreneurs and given out to take care of their daily business needs and help them in corporate growth.

3. Machinery Loans: As the name suggests, the loan is given out to take care of the machining needs of a company. You can take this loan to buy a new machine or upgrade/ repair an older one.

4. SME and MSME Loans: This type of loan is given to small and medium scale entrepreneurs to expand their existing market and boost their sales.

Secured vs Unsecured Business Loan

Business loan is extended both with secured assets and also without one. In case you decide to get a secured business loan by providing an asset such as any other business or a property in the form of a security, then the loan becomes a secured loan and here the rate of interests are lower. However, in the case of default payments, you would have to lose out on that asset and the bank can auction it to get back the loan value.

Contrarily, if you apply for a loan without providing an asset as security, then that would be an unsecured business loan. Here the interest rate would be much higher since in the case of a default, the bank cannot retrieve the loaned amount. However, it is essential that you do pay out the balance as well as the interest, since any default would show poorly on your credit score and you would find it difficult to apply for a future loan or credit card.

Benefits of Business Loan

Business loans offer a number of advantages and bring in the necessary capital without affecting your authority on the business. The benefits of business loan are listed below.

Business Establishment

Any time you start a business, you would need a decent sum of capital to establish it and the profits would take some time in coming. A business loan helps you bridge the gap between business establishment and the time when profit trickles in so that you soar through the difficult time and be prepared when the returns start to show. Business loan is also essential to make the necessary purchase in machinery and equipment, to pay the employees, and engage in other financial activities in business promotions.

Business Sustainment

Many times, due to adverse conditions, your business may go through a difficult phase. Still you need to sustain the business and work to patch up the opposing currents. At such times, you would require to pay all the vendors, and release salary slips for your employees. Business loans come in handy to help you tide through this phase and survive to enjoy the return of favourable time.

Business Expansion

Businesses are meant to be grown and expanded so as to reach a bigger consumer market. Yet, this expansion requires quite a lot of effort, not to mention the important financial input. At such a time, you can easily opt for a business loan to smoothly expand your business to the height that you want it to reach and you can pay off the interest through equal monthly instalments.

Easy Finance for Start-ups

Start-ups enjoy multiple benefits of a business loan. They can use this loan to invest in necessary requirements like business expansions, and dealer and vendor financing. Moreover, the start-up does not have to put forward any security or collateral to get this loan. Additionally, in the event of a default, the company could be liquidated to pay the debts. The best feature of a business loan is that it is structured according to a start-ups unique need and so paying off the debt becomes easy.

Documents Required

To avail the business loan, you would require certain documents such as

1. Identity Proof (Aadhar card/ Driving licence/ PAN Card/ Passport/ Voter ID card)
2. Address Proof (Aadhar card/ Bank Statement/ Driving license/ Passport/ Voter ID card/ Utility Bill/ Updated Bank Account Passbook)
3. Ownership Proof (Agreement Copy / Electricity Bill / Maintenance Bill with share certificate / Municipal tax bill/ Share certificate)
4. Business Continuity Proof (Shop and Establishment certificate/ Tax registrations-VAT/ Service tax/ GST registrations)
5. Firm Constitution (MOA/ Partner Ship Deed/ GST Registration Certificate)
6. Others (according to the requirement of the lending body)

How much Business Loan can I get? 

Depending on your business size, you can get a business loan up to Rs. 50 lakhs. The loaning body takes into consideration several factors before deciding on your loan eligibility such as your credit score, your business size, your annual turnover, and the loan tenure.

If your credit score is good, you can get the loan easily at an attractive rate of interest. However, if you have a bad credit score, there would be difficulty and you will get a lower amount loan. However, if you can put up an asset as collateral, then you can get a good loan value even with a poor credit score.

The repayment duration lies between 1 to 5 years and is dependent on the borrower’s repayment ability.

Interest Rates on Business Loan

The interest rate on a business loan remains the same throughout the loan duration. You can calculate the interest payment using a Business Loan EMI Calculator. In certain cases, the borrower may also opt for a floating rate of interest. Here the rate of interest would fluctuate in the loan duration. The average rate of interest lies in the range of 11 to 19 percent.

Can I Prepay the Loan?

You can prepay the loan if you have sufficient means to do so and save money on rates of interest. However, prior to opting for loan prepayment, you need to consider certain facts. First, you have to check whether your loan comes with any prepayment penalty charges. Many lenders have stopped this penalty on prepayments, but some still do. So, knowing about any charges may save you from unnecessary harassments.

Once, you are confirmed that your business loan is exempted from prepayment penalty, then do a detailed review of the payment structure (amortization schedule). In the case of front-loaded amortization, prepayment in the early months is beneficial.

What if I Fail to Repay?

If you fail to repay an unsecured business loan, then the lending body would try to make you pay through its traditional sources, failing which you will get a poor credit rating and this would affect your future capacity to apply for a loan or a credit card.

If you have secured a loan against a secure asset, then the lender could auction the asset to secure back the loan under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (Sarfaesi) Act. However, you would be given a legal notice before your property is being auctioned and sufficient time to save it through timely payment.

If you fail to repay the loan for more than 90-days, then your account would be termed as a non-performing asset (NPA), and you would be issued a 60-day notice, wherein if you fail to act, then your property would be put up for auction. Here again, the lending body would have to serve another 30-day public notice mentioning details of the sale.

Tax Benefits of Business Loan

You can enjoy tax benefits on the business loan just on the interest paid and not on the principal amount and can be shown as a part of business expense. You can calculate the tax liability by subtracting business expenses from overall business returns. The personal loan which you get for a business is also tax deductible.

Can I Make Balance Transfer?

You can make a balance transfer on your business loan if you are unsatisfied by the services of the existing lending body or if you find better interest rates at a new lender. Many people also make balance transfer when they get an extension on the duration of the loan with easy terms and conditions.

However, before going in for the balance transfer compare the before and after deals and check if there is actually a profit. For a good deal, there must be a lower interest rates in the same loan tenure. Next, look into the processing fee and any other hidden charges. Make it a point to go through the fine points carefully and know about each point mentioned in the document before signing on it.