Business Loan

What is a Business Loan?

A business loan or a commercial loan is a financial product offered by banks and other institutions to cater for the capital requirements of a business. It helps organisations to grow and expand in various business aspects. Lenders like NBFCs (non-banking financial institutions), credit unions, and other financial institutions also offer business loans. Like any other loan, the lender would provide a certain amount based on the business’s eligibility, and the borrower would repay it (principal+interest) in easy monthly instalments (EMIs) in a pre-agreed fixed period of time (tenure).

Types of Business Loans

Secured Business Loans

• Secured business loans are offered against collateral like company-owned land, property, equipment, commercial property or on a personal guarantee.
• Typically offered for start-ups and small and medium businesses to cater to their growing needs.
• Secured business loans can be used for working capital requirements, business expansion, machinery purchases, infrastructure development, etc.
• Eligible businesses for secured loans include SMEs, MSMEs, proprietorship & partnership firms, limited liability companies, and private or closely held companies.
• The secured business loan amount ranges from Rs.2 lakh to Rs.50 lakh.
• Offered at longer tenures and lower interest rates

Unsecured Business Loans

• Also called collateral-free loans
• Lenders do not require security or personal guarantees to issue unsecured business loans.
• These loans are provided based on the borrower’s creditworthiness and repayment ability.
• Typically issued to start a new business, to expand existing business, machinery or infrastructure upgrades, working capital requirements, etc.
• SMEs, MSMEs, Private limited firms, partnership firms, LLP, and sole proprietors who meet the criteria are also eligible for the loans.
• Attract high-interest rate of interest due to no security
• Faster approval
• Defaulting on unsecured loans would badly affect the credit score

Working Capital Loan

• Working Capital loans are provided for the regular operational needs and short-term financial obligations of a business.
• It can be available as both secured and unsecured loans.
• Typically used to buy stocks, raw materials purchases, pay staff salaries or rent, daily expenses, inventory management, and other short-term needs.
• Not meant for business expansions or asset purchases
• Typically issued with a short repayment tenure – 3 to 48 months.
• For secured working capital loans – business-owned property, securities, gold, investments or the business itself can be considered as collateral.
• For unsecured working capital loans – lender’s financial statements, credit score,  tax returns, and business turnover are taken into account
• Eligible business types include self-employed, private or public companies, partnership firms, MSMEs, self-employed professionals or non-professionals.
• Different types of working capital loans are available, including Overdraft Facility or Cash Credit, Term Loans, Accounts Receivable Loans, Post Shipment Finance, Bank Guarantee Loans, etc.

Term Loan Facility

• A term loan is a commercial business loan with a fixed repayment schedule and interest rate.
• Both secured and collateral-free term loans are available
• A flat interest rate will be charged throughout the tenure
• Higher tenures attract lower interest rates
• Generally used for large capital expenditures
• Interest is a tax-deductible expense
• Term loan amount typically varies from Rs.50,000 to Rs. 2 Crore
• Tenure up to 7 years

Over Draft (OD) Facility

• Also called Cash Credit Limit Facility
• Not like a regular business loan
• Issued only to current accountholders of the bank
• An overdraft facility allows businesses to use funds up to a prescribed limit.
• Banks offer a prespecified amount for the OD facility up to Rs.10 lakhs.
• The eligibility to apply for an OD depends upon the borrower’s repayment history, account value, banking relationship, credit score, and other factors.
• Businesses can withdraw the required funds and pay interest only on the utilised amount.
• Suitable for short-term business goals and business emergencies
• Interest rates are calculated on a daily or monthly basis
• Repayments can be made by simply depositing the amount in the borrower’s current account
• The repayment tenure is typically 3-12 months. Borrowers can repay the principal amount at any time within the tenure, but the interest must be paid monthly.
• The OD facility attracts an annual fee, processing fee and others based on the bank’s terms

Government-backed Loans

The Indian government has launched various credit schemes to encourage MSMEs. Some schemes include Pradhan Mantri MUDRA Yojana (PMMY), Stand-up India, Credit Guarantee Schemes (CGS), etc.

Features and Benefits of A Business Loan

• High loan amounts
• Flexible tenures
• Minimal documentation
• Faster disbursals
• No collateral
• Easy repayment options
• Competitive interest rates
• Online application process

Benefits offered by Business Loans

• Easily accessible
• Flexibility to use
• Tax benefits
• Convenient repayment
• Helps in business growth & expansion
• Helps in building your credit score

FAQs on Business Loan

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