Business Loans

Overview

Irrespective of the size of a business or its level of operations, businesses cannot stress enough the importance of securing funds to ensure its sustenance and long-term growth. Securing funds helps a start-up not only to begin their journey but also to purchase requisite assets, hire a team, rent an office, or allow branding and promotions. Businesses may raise capital from investors or borrow funds from financial institutions per their preferences. 

Therefore, deciding to borrow funds is a crucial decision for any business entity that affects not only the immediate financial state of the organization but also its continuing growth cycle. Business loans not only foster growth but also support borrower organizations to grow and scale businesses or keep going through challenging periods. When making a decision, borrower organizations need to reflect not just on the terms and conditions of loan repayments but also on the flexibility of the loan products, the credibility of the lender as well as the complete borrowing experience. Keep reading to find out more about business loans, their purpose, types, eligibility criteria, documentation required, etc. and more.

What is a Business Loan? 

In simple language, when a business borrows money for its operations and growth, it is a business loan. Banks and Non-Banking Financial Institutions (NBFCs) are the institutions that may lend to the business. Businesses borrow the required sum of money from financial institutions at a certain rate of interest for a fixed duration. At the end of which the amount has to be repaid to the lender. Such loans are taken to fulfill certain business goals only and not for personal purposes. The sum can be disbursed either as a lump sum amount or as a line of credit for businesses. Business loans support businesses to flourish and expand by extending necessary essential financial support.

Business loans can either be secured or unsecured depending upon the creditworthiness or availability of collateral with the borrower organization. The terms of repayment of loans, including the interest rate, may be different for every entity depending on factors such as the business’s financial health, credit history, industry, and lender’s policies.

Purpose of Business Loans

The purpose of business loans could be to meet any necessary business expenses to facilitate faster growth and a higher scale of operation. It could be for.

1. Meeting Operational Costs – Business loans can help business organizations meet day-to-day operations requirements during irregular cash flow periods. Credit facilities act as a can offer a means of survival to regulate uneven cash flow which will fulfil covering day to day expenses. 
2. Entering a new market – Businesses aspiring to enter new markets, either domestic or international, may require additional funds to scale their business.
3. Inventory purchase – Inventory is vital for the existence of the business thus accessing funds through loans enables shelves to be stocked and product offerings to be assorted.
4. Acquiring necessary assets or Equipment – For better productivity businesses need to repair and replace equipment and machinery from time to time for which business loans can be used to enhance operational efficiency and competitive edge.
5. Restructure existing debts – Businesses may sometimes opt to consolidate their debts through a single loan at a lower rate of interest allowing easier financial management. 

Eligibility Criteria for Business Loans 

1. Credit Score- Businesses possessing a good credit score show their creditworthiness and financial responsibility. Typically, a credit score of 650 or higher is desirable.
2. Years in existence – Lenders look for businesses that have been in existence with stable operations for at least two years. 
3. Annual revenue or turnover – Before sanctioning the loan, lender institutions want to ensure that the business has a minimum annual revenue to ensure timely repayments.
4. Cash flow – Businesses should have a positive cash flow to show that it has adequate cash flow to cover expenses and make timely repayments. 
5. Debt-to-Income Ratio- Lenders also evaluate the debt-to-income ratio of the applicant businesses through a comparison of the gross income. Normally, lenders prefer applicants with a lower debt ratio which indicates the efficiency of the business to manage additional debt.
6. Collateral Requirement – Lenders may or may not require certain collateral for business loans to be enforced in the event the borrower fails to make loan repayments. 
7. Business Plan- Applicants shall have a well-prepared business plan that shows their business goals, strategies, financial projections, etc. which supports the creditors to gauge business growth potential. 
8. Industry Type- Since certain industries carry more risk than others. Therefore, businesses belonging to stable or growing industries could be more preferred than unstable industries. 
9. Regulatory compliances-Businesses with up-to-date regulatory compliance are preferred by lending institutions. 
10. Outstanding Debt – Lending institutions also assess the credit history of the business by checking whether the business has massive debts, which might reduce the eligibility of the applicant business organization. 
11. Other factors- In addition to all the above, lending institutions also consider other factors such as the education and work experience of the entrepreneur or its key team members, whether there is any history of loan defaults or crime, etc. to assess their business management ability.

Documents Required 

1. Copy of ID proof and proof of residence for all the applicants and co-applicants of the loan. 
2. Copy of PAN card for all the applicant/ or co-applicant.
3. Bank account statements of the applicant business organization
4. Any other documents required for assessing the creditworthiness of the business;
5. Business Incorporation related documents.

Limits and Restrictions for SME and MSME business loans

Maximum permissible Loan amount

The uppermost limit allowed as a loan ranges up to Rs. ₹5 crore or more based on the financial health, credit history, and repayment ability of a business. 

Repayment Duration

SME loans can be granted for a maximum period of up to five years only and can only be exceeded upon meeting certain business requirements. 

Age of the business owner or representative

In order to be eligible for an MSME business loan, the business owner shall fulfill all eligibility criteria including minimum income, credit score, business turnover, and age not above 65 years. 

Availing Government subsidies

SME Units that have already availed government subsidies under one scheme are ineligible for availing of SME loans under another scheme. 

Types of Business Loans

Term Loans – 

Term loans are the most popular category of business loans. Such loans can be either secured or unsecured in nature depending upon the creditworthiness of the applicant business. While unsecured term loans typically extend up to five years, secured loans can be for up to twenty years. 

Working Capital Loans – 

Working capital loans are borrowed by businesses to support their day-to-day operations, encompassing accounts payable, employee wages, and other short-term immediate financial obligations. 

Start-up Loans – 

Start-up Loans are specially structured to meet the demands of burgeoning entrepreneurs enabling them to transform their business concept into a real business despite any credit score or collateral requirement.

Equipment Financing – 

Generally, manufacturing businesses avail machinery or equipment financing to either purchase updated equipment or machinery or upgrade existing ones.

Government Loans –

In order to encourage small business units or SMEs, individuals, women entrepreneurs, etc. to be offered subsidized and collateral-free loans to set up their businesses, carry out business functions seamlessly, or grow their businesses through essential financial support. Such schemes are extended through public sector banks as well as private lending institutions. 

Benefits of Business Loans

No requirement for sharing of ownership or profits required – 

Unlike raising capital from investors through the issue of equity, availing a business loan helps the business to fulfill its business goals without losing any control or external pressure or having to share the profits earned through the venture.

No Collateral Requirement – 

Business loans, particularly offered to small businesses, enable access to necessary funds without any collateral requirement enabling a simpler and smoother process of borrowing. 

Enhanced Working Capital – 

Liquidity challenges make it tough to run the business efficiently thus, working capital loans fulfill short-term funding requirements helping businesses to sustain and thrive despite market fluctuations.

Flexible Loan Limit – 

Typically, the business loans offered to businesses range from Rs.3 lakh to 1 Crore rupees to accommodate the business needs of businesses of all sizes, whether start-ups or large businesses. Business loan’s flexible amount ensures convenience. 

Convenience and Accessibility – 

Personalized Business Loans allow businesses to lay more emphasis on building core competencies and enable businesses to grab opportunities without any delays. 

Competitive Interest Rates –

The competitive lending industry leads to favorable interest rates for business loans that ultimately benefit businesses and entrepreneurs for strategic investments and expansion objectives, ensuring better revenues and long-term business growth. 

Tax Benefits – 

Interest payments on Business Loans help businesses to avail deductions for loan interest payments minimizing their tax liabilities and saved funds can be applied to capitalize on growth-oriented projects,

Prompt Disbursement – 

Businesses with proper documentation can seek business loans simply and quickly through effective disbursement processes. 

Extended Repayment Period – 

Business Loans also come with flexible terms of repayment that permit borrowers to make repayments in manageable equated payments periodically leading to efficient cash flow management and growth activities. 

Conclusion

Therefore, Business Loans have played a crucial role in nurturing and fostering the entrepreneurial ecosystem in the country supporting entrepreneurs to set up businesses, run operations, purchase machinery or equipment, extend their operations beyond national boundaries, and help them to navigate through challenging times, and achieve success by fulfilling their goals. Thus, sufficient knowledge about business loans and making decisions prudently could help entrepreneurs capitalize on growth prospects and grow their businesses sustainably in a challenging competitive environment. To know more on how to manage your loans better book a free Demo with BankKeeping.