Type of Business Loan, Requirements & Qualifications
A loan specially designed for business needs is known as a business loan. It entails debt formation, similar to all loans, which will be repaid with additional interest. Bank loans, mezzanine finance, asset-based financing, invoice financing, microloans, business cash advances, and cash flow loans are just a few of the business loans available.
What is the eligibility for applying for a business loan?
The eligibility for applying for a business loan has a running business for more than one year with a minimum Annual Turnover of Rs. 12 lakh or above for existing enterprises. It would help if you had a credit score of 750 or above, and you should not have a previously unpaid loan.
What are the documents required to apply for a loan?
The following records must be provided when making a loan application for a business:
- properly completed application form and two passport-sized photos
- the applicant's PAN card, passport, and Aadhar card, among other documents required by KYC
- Utility bills (water/electricity), a driver's license, and a voter identification card
- bank statement from the previous year
- if any, a copy of the non-collateral overdraft
- Business Incorporation Copy
- any further paperwork the lender may ask
Types of Business loans
- Working Capital Loan- Businesses employ working capital loans to cover their everyday expenses and business expansion services, boost business cash flow, buy raw materials, add to their inventory or stock, pay salaries, hire personnel, etc. Working capital loans are often short-term loans with up to a 12-month repayment period. This loan is also known as a collateral-free loan because the borrower is not required to provide the bank with any security or collateral. In contrast to long-term loans or other company loans, the interest rate is a little higher.
- Letter of Credit- A credit limit is mainly utilized by trading companies when the bank or lender gives financial guarantees to businesses engaged in international commerce. Entrepreneurs can use letters of credit for both import and export transactions.
- Term Loan - A term loan has a predetermined repayment schedule that must be followed. There are two types of term loans: short-term loans and long-term loans. These two varieties have repayment terms ranging from 12 months to 5 years. Short-term loans have a tenure of no longer than one year, whereas long-term loans have up to ten years.
- POS Loans or Merchant Cash Advance- A business owner operating an operation pays a lump sum payment in advance to suppliers through their daily or upcoming credit or debit card transactions through a POS Loans or Merchant Cash Advance process. Compared to other business loan options, the interest rate offered by POS loans is somewhat greater.
- Overdraft Facility-A bank's overdraft facility allows an account holder to take money from their account even if there is no money. Only the amount of the sanctioned limit used is subject to interest charges, which are assessed daily.
- Equipment Finance or Machinery Loan- The equipment finance or machinery loan is a funding choice made available to borrowers so they can upgrade or buy new equipment or machinery. Large businesses and manufacturing industries are the most common users of equipment finance.
- Bill/Invoice Discounting- Bill or invoice discounting is a funding option where the lender gives the seller money up front at a reduced rate. This requires customers to contribute in the form of interest rate, the form of interest paid, and the monthly fee to increase the revenue of the financial institutions.
Government schemes for a business loans in India
The Indian government has launched several loan programs to support people, MSMEs, women business owners, and other manufacturing, service, and trade organizations. Various financial organizations, including commercial and public sector banks, NBFCs, Regional Rural Banks (RRBs), Micro Finance Institutions (MFIs), Small Finance Banks (SFBs), etc., give loans through government programs.
- MSME Loan Scheme
- Credit Guarantee Fund Scheme
- MUDRA Loan
- Credit Link Capital Subsidy Scheme
- National Small Industries Corporation Subsidy
- SIDBI Loan
A business loan is a lending option provided by banks and NBFCs to satisfy the financial needs of businesses and self-employed clients. Individuals, MSMEs, business owners, entrepreneurs, experts, and other business organizations can use it. Secured and unsecured loans are the two main categories into which business loans fall. Secured loans are those in which the borrower must deposit security or collateral with the lender to obtain a business loan. Unsecured loans don't require submitting any security or collateral to the bank, NBFC, or any other lender. The Mudra Scheme under PMMY, PMEGP, CGTMSE, Standup India, Startup India, PSB Loans in 59 minutes, PMRY, and other popular loan schemes sanctioned by the government.