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Business Loan- Things to keep in mind!
1
Get high Business Loan Eligibility
Before applying for the loan, prepare a business plan, know your credit score, decide the loan amount, do some market research on available business loan options, and keep the documents ready.
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Common Documents Required
Proof of address & photo identity proof of the promoters, business proof, income proof, partnership deed for partnership firm, articles of association, memorandum of association, board resolution, PAN card, etc.
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Criteria for Business Loan Approval
Applicants should be aged between 21 to 65 years, having business vintage of a minimum of 1-2 years. The minimum business turnover and a minimum annual turnover as per the ITR will be required. The business should be profit-making for at least the last 1 year.
Types of Business Loans in India
In India, various types of business loans are available to cater to different needs and stages of businesses.
Here are some common types of business loans offered:
- Term Loans
- Working Capital Loans
- Business Expansion Loans
- Equipment Financing Loans
- Invoice Financing & Bill Discounting
- Machinery Loans
- Professional Loans
- Personal Loans for Business
- Government-Sponsored Loans(CGTMSE/MSME)
- Merchant Cash Advance
- Line of Credit/OD
- Secured Business Loans
- Unsecured Business Loans
Term Loan:
A term loan is a type of loan where you receive a specific amount of money upfront and then pay it back over a set period, usually with fixed monthly payments. It's often used for things like buying equipment or expanding a business or can be taken on an individual basis as well. The interest rate can be fixed or variable, and the loan term can vary.
Working Capital Loan:
A working capital loan is a loan that is taken by a company to support the daily operations of their business. Clients across small and medium enterprises can benefit from a working capital loan to finance short-term needs. Based on the types of business, the requirements for operating expenditure vary. According to the unique requirements, banks offer a tailored working capital amount. Several Small and Medium Enterprises (SMEs) use working capital loans to bridge their financial gaps like the repayment of debt. Especially for seasonal businesses, a working capital loan can help companies meet their daily operational costs. Working capital loans are only offered to SMEs and Micro Enterprises to fund their daily operations.
Bill/Invoice Discounting:
Bill or invoice discounting is a financial practice that involves the selling of a business's unpaid invoices or bills to a third party (typically a financial institution or a factoring company) at a discounted rate. This allows the business to receive a portion of the invoice amount upfront, rather than waiting for the customer to make the full payment at a later date
Letter of Credit (LC):
A Letter of Credit (LC) is a document issued by a bank that guarantees a buyer's payment to a seller in a trade transaction. It ensures that the seller will be paid once they meet the agreed conditions, usually involving shipping documents. LCs are commonly used in international trade to minimize risks for both parties. The buyer's bank guarantees payment, and the seller's bank confirms the terms are met before releasing funds.
Point-of-Sale (POS) Loan / Merchant Cash Advance
Point-of-Sale (POS) Loan:
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Financing offered to customers at the time of purchase.
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Customers can pay for products over time.
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Business partners with a lender to provide this option.
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Can increase sales and customer flexibility.
Merchant Cash Advance (MCA):
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Lump sum payment to a business.
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Repaid from a portion of daily credit card sales.
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Quick approval but may have higher costs.
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Useful for quick funding but consider fees.
Overdraft (OD)
An "overdraft business loan" is a type of credit facility offered to businesses by banks or financial institutions. It allows a business to access extra funds beyond their account balance, up to a pre-approved credit limit. This can help businesses manage temporary cash flow gaps and cover unexpected expenses.
Key points about an overdraft business loan:
- Flexible Access: Businesses can withdraw funds up to the approved credit limit whenever needed, providing flexibility in managing day-to-day operations.
- Short-Term Solution: It's designed to address short-term financial needs, such as covering payroll, purchasing inventory, or managing seasonal fluctuations.
- Interest and Fees: Businesses pay interest on the amount borrowed and may also incur fees, which can vary based on the terms and the bank.
- Credit Limit: The bank sets a maximum amount that the business can overdraw. This limit is determined based on the business's creditworthiness and financial history.
- Repayment: The business is expected to repay the borrowed amount when their cash flow improves. Interest is typically calculated only on the outstanding balance.
- Qualification: Businesses need to meet certain eligibility criteria and provide financial documentation to apply for and secure an overdraft business loan.
- Convenience: It provides a convenient buffer to manage temporary financial challenges without requiring a formal application process each time funds are needed.
- Risk Management: While helpful, businesses should be cautious not to become overly reliant on overdrafts, as continuous use can lead to higher interest costs.
Overdraft business loans can be a useful tool to bridge gaps in cash flow and ensure smooth business operations. However, it's important for businesses to have a clear repayment plan and to monitor their finances to avoid excessive borrowing and associated costs.