Business Loans: A Beginner’s Guide

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Every business whether big or small, established or new need finance to fund working capital as well as for growth and expansion activities. The commercial loan market in India is rapidly evolving. There are many lending institutions that provide loans to large business entities as well as start-ups. The Government of India has also provided many business loan schemes and programs to encourage entrepreneurs to start new ventures.

Unlike personal loan, business loan is specific to the business, its requirements and goals. Such kind of loan is to be repaid with interest on or before a fixed date. To name a few type of loans that are available finance for working capital loans, corporate term loans, and term finance are the most commonly used. Working capital loans are provided for the daily operations of a business. Corporate term loans, on the other hand, are used for growth and expansion purposes. Term loans are provided to businesses for acquiring assets like land, plant and machinery besides others.

The Government of India also provides various schemes offered through public sector banks to financially assist small and medium enterprises (SMEs). Some of which are Credit Guarantee Fund Scheme for Micro and Small Enterprises, Credit Link Capital Subsidy Scheme for Technology Upgradation, Market Development Assistance Scheme for MSMEs, Technology and Quality Upgradation Support to Micro, Small and Medium Enterprise. The main objective of these schemes is to boost India’s economy and place additional emphasis on business development.

Though various lenders have their own eligibility criteria business loan can be offered to:

1) Any person who is owner of a legitimate business must be 21 years of age while applying for the loan and maximum 65 years at the end of the tenure.

2) The borrower must submit supporting documents like Income Tax Returns, Memorandum of Association, Articles of Association, bank statements, Profit and Loss account statements, Balance sheet statements, as well as basic Know-Your-Customer (KYC) documents.

Following points are also taken into consideration before offering a loan:

1) Type of the business.
2) Turnover of the business.
3) Profit of the business.
4) Cash flow of the business.

Documents required for business loan.

1) ID Proof
2) Address Proof
3) Proof of Continuity of Business
4) Bank statements of last six months
5) ITR & Statement of Computation of Income (for last 2 Years)
6) CA certified or P/L Account Statement (for last 2 years)

Points to remember before applying for a business loan

Business Plan:

A business gives lenders insight on the nature of your business, future goals, projected revenue and expenses, whether it’s credible or not. It is a base document required to obtain the funding for a business entity.

Financial Statements:

It is an essential document when an organization is seeking funding from lenders. You’ll need to include financial statements like income statements, bank statements, cash flow statements, balance sheets etc.

Know Your Credit History:

Credit score plays a pivotal role in your business loan application. It is best advised to check the credit score yourself before applying for a loan. If your business hasn’t had enough time to establish credit, you’ll want to take extra steps to clean up your credit history as this is what lenders will look at. If you have less than perfect credit, you may want to hold off for some time and build your business and personal credit before applying to improve your chances.