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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.
2
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.
3
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.
Business Loan Eligibility and Documents
Read on to know the criteria required to apply for our Business Loan.
Eligibility Criteria & Eligible Entities
Business Type: Most lenders provide loans to various types of businesses, including sole proprietorships, partnerships, limited liability companies (LLCs), corporations, and more.
Credit Score: A good credit score is often required to qualify for a business loan. Lenders use your credit history to assess your ability to repay the loan.
Business Age: Some lenders require a minimum operational history for your business, usually ranging from a few months to a year or more.
Annual Revenue: Lenders may have a minimum annual revenue requirement to ensure your business has a stable income.
Collateral: Secured loans might require assets as collateral to secure the loan. Collateral can be real estate, equipment, inventory, or other valuable assets.
Cash Flow: Lenders often evaluate your business's cash flow to determine your ability to repay the loan.
Age Criteria: Min. 21 years at the time of loan application & Max. 65 years at the time of loan maturity.
Eligible Entities: Individuals, MSMEs, Sole Proprietorships, Partnership Firms, Public and Private Limited Companies, Limited Liability Partnerships, retailers, traders, manufacturers, and other non-farm income-generating business entities engaged only in the services, trading, and manufacturing sectors
Business Vintage : Min. 1 year or above
Business experience: Min. 1 year, business location to remain same
Annual Turnover: Shall be defined by the Bank/NBFC
Credit Score: 700 or above (Preferred by most private and public sector banks)
Nationality: Indian citizens
Additional Criteria: Applicants must own either a residence, office, shop, or Godown.
Eligible Entities:
Eligible Entities: Individuals, MSMEs, Sole Proprietorships, Partnership Firms, Public and Private Limited Companies, Limited Liability Partnerships, retailers, traders, manufacturers, and other non-farm income-generating business entities engaged only in the services, trading, and manufacturing sectors
Documentation for Business Loans
The list of documents to be submitted varies based on type of business entity. Submit the following documents to begin with the loan process:
● ITR for the past 2-3 years
● Current Bank Account Statement for the last 12 months
● Photocopy of PAN Card
● Address Proof for Residence such as Voter Card, Passport, Aadhaar Card, Telephone Bill, Electricity Bill
● Address proof for Business such as the Telephone Bill or Electricity Bill
● Last Financial Year's provisional Financials and future year's projections.
● Company's business profile on the letterhead
● 2 photographs of promoters and property owners.
● Sanction letter and Repayment schedule of existing loan
● GST registration certificate and GST returns of latest 2 years.
● D-Vat/Sale tax registration copy
● Udhayam Aadhaar registration certificate
● Rent agreement copy of factory and residence (if property is rented)
● Business Continuity proof of 3 years (3 years old ITR/Company registration etc)
● Company PAN Card, Certificate of Incorporation, MOA, AOA, List of Directors, and Shareholding pattern for Pvt Ltd companies
● Partnership Deed, Company pan Card for Partnership Companies
How to use Business Loan EMI Calculator
Using a business loan EMI (Equated Monthly Installment) calculator can help you estimate your monthly loan repayment amount.
Follow these steps to use a business loan EMI calculator effectively:
- Enter loan amount, interest rate, tenure.
- Click Calculate.
- View EMI, total interest, repayment.
- Adjust tenure if needed.
- Consider extra costs.
- Check budget compatibility.
- Confirm with the lender before finalizing.
How is Business Loan EMI Calculated?
Business Loan EMI (Equated Monthly Installment) is calculated using the following Compound Interest formula:
EMI = [P * r * (1 + r)^n] / [(1 + r)^n - 1]
Where:
EMI = Equated Monthly Installment
P = Loan principal amount
r = Monthly interest rate (Annual interest rate divided by 12, expressed as a decimal)
n = Loan tenure in months
How is Interest Calculated on a Business Loan?
Interest on business loans can be calculated using two methods:
- Simple Interest or Compound Interest.
- Simple Interest Method: Calculated only on the initial loan amount. Formula: Simple Interest = Principal × Interest Rate × Time
- Compound Interest Method: Takes into account both initial principal and accumulated interest. Formula: A = P × (1 + r/n)^(nt), where A is the total amount, P is principal, r is interest rate, n is compounding frequency, and t is time.
- Interest calculation affects overall cost. Understand the lender's method and fees before finalizing.
What are the Factors that affect Business Loan EMI?
Several factors influence the Equated Monthly Installment (EMI) for a Business Loan:
- Loan Amount : Higher loan amounts lead to larger EMIs, as you're repaying a larger principal over time.
- Interest Rate: A higher interest rate results in larger EMIs and vice versa. Shop for competitive rates to lower your EMI burden.
- Loan Tenure : Longer tenures decrease individual EMIs, but increase total interest paid. Shorter tenures do the opposite.
- Type of Interest: Fixed or floating interest rates affect EMIs differently. Fixed rates keep EMIs constant, while floating rates may change periodically.
- Frequency of Compounding: In compound interest loans, more frequent compounding (monthly vs. annually) can impact EMIs.
- Processing Fees: Upfront fees charged by lenders can increase the effective loan amount and EMI.
- Prepayment: Opting for prepayment or part-payment can reduce the loan principal and subsequently lower EMIs.
- Credit Score: A better credit score can lead to lower interest rates, thus affecting your EMI.
- Business Financials: Your business's financial health and stability may impact the loan terms offered.
- Market Conditions: Economic factors can influence interest rates, affecting your EMI.
- Loan Type: Secured loans (backed by collateral) might have lower EMIs compared to unsecured loans.
- Lender Policies: Each lender may have specific policies affecting loan terms and EMIs.
By understanding and considering these factors, you can make informed decisions about your business loan and manage your EMI effectively.
Fees and Charges for Business Loan
The fees and charges of business loans usually vary from lender to lender and from case to case. The aforementioned table will give you a fair idea of the fees and charges related to business loans:
Particulars
Charges
Loan Processing Fees
1.5% to 5% of Loan Amount
Loan Cancellation
Usually 0 to 5% of Loan Amount
Stamp Duty Charges
60/- to 600/-
Legal Fees
Nil
Penal Charges
Nil
EMI / Cheque Bonus
Approx 499/- to 599/-
Business Loan Reviews
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All employees and staffs in RULOANS are helpful. They are very co- operative and try to clearly understand customer’s needs. I felt very comfortable dealing with them through for my business loan from ICICI bank
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Business Loan FAQs
A business loan is a type of financing provided to businesses for various purposes, such as starting a new business, expanding operations, purchasing equipment, or managing cash flow. The amount one can borrow depends on several factors, including the lender's policies, the borrower's creditworthiness, the purpose of the loan, and the financial health of the business. Typically, business loans can range from a few thousands to several Lakhs. Lenders assess the borrower's ability to repay the loan based on factors such as credit score, business revenue, and profitability.
Business loans are available to various entities, including sole proprietorships, partnerships, LLCs, corporations, non-profit organizations, and startups. Eligibility is typically based on factors like the business's creditworthiness, revenue, profitability, and the borrower's personal credit history. Each lender may have specific criteria, so it's advisable to check with them for exact requirements.
To get a business loan, you typically need to provide a business plan, demonstrate a good personal and business credit score, submit financial statements and tax returns for your business, and possibly offer collateral. Additional requirements may include legal documents, bank statements, and personal identification. Requirements can vary, so it's best to check with the lender for the specific documentation needed for your loan application.
Udyam Registration, or MSME Registration, is a special card granted to small and medium-sized businesses by the government of India. This card has a unique number and a certificate stating that the company is a micro, small, or medium enterprise. This Udyam registration helps MSMEs secure loans with lower interest rates, reduced collateral requirements, and faster processing times, making it easier for small businesses to grow and thrive.
By registering under Udyam, businesses can also gain access to government subsidies, tax benefits, and other financial support tailored to their needs. This initiative is part of the government's broader effort to promote entrepreneurship and support the growth of MSMEs in India.
Minimum Cibil score required for acquiring a business loan is generally 650+ but it also depends on various lenders.
To qualify for an instant business loan, you typically need a good credit score, stable revenue, and a low debt-to-income ratio. Lenders may also require your business to have been operational for a certain period. Meeting these criteria increases your chances of qualifying for an instant business loan, which can provide quick access to funds for your business needs.
Business loan is an unsecured loan in which one doesnt need any collateral to secure a loan from any lender.
The Government of India has initiated several loan schemes to support various sectors and promote entrepreneurship and economic development. Some key loan schemes include:
1) Pradhan Mantri Mudra Yojana (PMMY)
2) Stand-Up India Scheme
3) Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE)
4) Startup India Scheme
5) Prime Minister's Employment Generation Programme (PMEGP)
6) Credit Linked Capital Subsidy Scheme (CLCSS)"
7) National Rural Livelihoods Mission (NRLM)
These schemes are aimed at providing financial support and promoting entrepreneurship across various sectors of the economy.
Qualifying for a business loan typically involves having a good personal and business credit score, a minimum level of business revenue, and a certain amount of time in business. Lenders may also require financial statements, a business plan. Meeting these criteria can improve your chances of qualifying for a business loan, but requirements can vary among lenders.
Yes, it is possible to get a business loan with bad credit, but it can be more challenging. Some alternative lenders specialize in providing loans to businesses with less-than-perfect credit, but they may charge higher interest rates. Offering collateral or having a co-signer with good credit can also increase your chances of approval. Additionally, working on improving your credit score before applying can help you qualify for better loan terms.
You can use a business loan for various purposes, such as expanding your business, purchasing equipment or inventory, hiring staff, launching marketing campaigns, renovating or expanding your premises, managing cash flow, consolidating debt, or investing in new technology. Business loans provide flexibility to address your specific business needs and can help you achieve your growth and expansion goals.
Yes, you can usually pay off a business loan early, but it's important to check your loan agreement for any prepayment penalties or fees that may apply. Some lenders charge a fee if you pay off the loan before the agreed-upon term, while others allow early repayment without penalties. If you're considering paying off your business loan early, contact your lender to understand any potential fees and to discuss your options.