The Essential Guide to Business Loans

From starting a firm from scratch to expanding operations, businesses rely on capital. But raising capital takes effort. Enter business loans.

Business owners turn to banks and avail of loans to raise funds. And that’s just what business loans are.

Business loans are provided by banks or financial institutions to fund the start of a new business, expand an existing one, or purchase assets.

Your creditworthiness determines whether you qualify for secured or unsecured loans for business.

So, let’s navigate the various subtopics in business loans and see how they can help your business grow and thrive.

Type of Business Loans Offered in India

Term Loan

This is the most widely offered business loan. You receive a specific sum at a fixed interest rate for a set repayment period.

Overdraft

It is a tool that allows businesses to access funds beyond their account balance. The fund limit is pre-determined by the banks or lending institutions.

Letter of Credit

This is a financial tool used widely in international business transactions. The company’s bank issues a payment guarantee to the vendor or supplier of goods or services.

Cash Credit

It is a short-term loan provided to businesses to maintain their working capital. This is beneficial for organisations with irregular or seasonal income.

Startup Loan

This is a secured business loan where you receive funds against mortgaging a residential, farmland, or commercial property.

Project Loan

It is a loan disbursed to finance large projects. Businesses involved in real estate, manufacturing, infrastructure, transportation networks, and mining avail of this loan.

Benefits of Business Loans

Capital

The primary reason for availing of loans for business is access to capital. With capital, you can raise a company from the ground up, expand an existing business, obtain new machinery, or finance marketing efforts.

Tax Benefits

The interest on your loan is tax-deductible, i.e., it can be subtracted from your company’s gross income to reduce the taxable income.

Repayment Period Flexibility

Banks allow easy and flexible repayment periods for businesses. You can tailor your repayment tenure depending on cash flow. This means you decide if you want a short-term or a long-term loan.

Credit Rating-dependent

Your creditworthiness will favour you in obtaining a loan with a lower rate of interest. Also, your positive loan repayment habits will improve your credit score further.

Minimal Documentation

The amount of paperwork required to obtain a business loan is less. Meaning, approvals are faster and disbursements swifter.

Factors that Determine Approval of Loans for Business

• Credit Score: Every bank has a pre-determined credit score requirement to establish your creditworthiness.
• Business Plan: A company seeking financing assistance must have a business plan to prove how it’ll run, generate revenue, and be successful.
• Revenue: Businesses must declare their revenue statement to prove they can repay the loan.
• Legal Documents: You must produce audited balance sheets, revenue statements, tax returns, certificates of incorporation, and pertinent legal documents.
• Collateral: Secured loans for business require you to pledge your property or assets as collateral. Lending institutions use this to reduce risk.

How Can I Apply for Business Loans?

1. Visit the bank’s website and find the business loan application form.
2. Fill out the form with all the details requested.
3. Gather the required documents and submit them with the application form online or physically at the bank.
4. The bank’s representative will contact you to verify your application or seek additional information.
5. The bank will issue a loan offer based on the details you’ve provided in your application form. Read this offer thoroughly and accept it only if you agree with the terms.
6. Upon your acceptance, your application will be approved, and the loan will be made available in your bank account.

Conclusion

Business loans for new businesses, startups, or expansion of an existing business drive growth and make operational costs manageable. However, it is wise to evaluate lenders before applying for one.

Also, understand the different loans your business is eligible for and choose the one that fits your requirements. Business loans allow businesses to meet expenses during difficult times and build creditworthiness. Use them wisely to fund your business and achieve your entrepreneurial goals.