A business loan is a type of loan for business related purposes. It can also be termed as a commercial loan. Generally, when a loan is taken, debt is created to be repaid with a certain amount of interest. In the same way, when a loan is intended for business purpose, there occurs a liability i.e. debt to be repaid with interest amount.
Overview:
A business loan is a type of loan for business-related purposes. It can also be termed as a commercial loan. Generally, when a loan is taken, debt is created to be repaid with a certain amount of interest. In the same way, when a loan is intended for business purposes, there occurs a liability i.e. debt to be repaid with interest amount.
A business loan can be helpful in the following ways:
- for the startup company to explore their business
- it can be helpful to businesses to expand their operations
- for purchasing equipment or stock for the business
- to bear daily expenses
- helps in raising capital for the company etc.
The main purpose of providing a business loan is to meet the needs of the company immediately. Loans can be available for any type of business company whether it be sole proprietors, shopkeepers, self-employed persons, partnership firms, privately held companies, small scale or big scale businesses, etc. There are also various types of loans such as term loans, start-up loans, working capital loans, secured or unsecured business loans, etc.
For beginners, it gets difficult to understand the process and the question arises as to how to obtain a business loan. Many of them have never applied for such a loan and so they might be unaware of the criteria and documents to be provided.
Business Loan Interest Rates from Top Banks/NBFCs
Bank/NBFC |
Institution Type |
Business Loan Interest Rates |
| Axis Bank | Bank | 17% |
| Aditya Birla Finance Ltd. | NBFC | 18% – 24% |
| Arohan Financial Services Ltd. | NBFC | 20.10% – 26.99% |
| Capital First | NBFC | 22.00% – 24.00% |
| Clix Capital Services Pvt. Ltd. | NBFC | 19% |
| Deutsche Bank | Bank | 11.49% |
| Edelweiss Financial Services Ltd. | NBFC | 18% |
| Equitas Small Finance Bank | Bank | 18% |
| Fortune Financial Services – Kapital Tech | NBFC | Custom |
| SMFG India Credit | NBFC | 17% |
| HDB Financial Services Ltd. | Bank | 22% – 36% |
| HDFC Bank | Bank | 15.00% to 21.20% |
| ICICI Bank | Bank | 16% |
| IDFC Bank | Bank | 19% |
| India Infoline | NBFC | 18% – 25% |
| IndusInd Bank | Bank | 16% -18% |
| Kotak Mahindra Bank | Bank | 16.00 % to 19.99% |
| Lendingkart Finance Ltd. | NBFC | 17% – 27%* |
| Magma FinCorp Ltd. | NBFC | 17.5% – 21% |
| Neo Growth | NBFC | 24% – 36% |
| RBL Bank Ltd. | Bank | 19% – 27% |
| Standard Chartered Bank | Bank | 17.25% – 20% |
| Tribe Tech Private Limited | NBFC | 12% – 36% |
| Yes Bank | Bank |
Business Loan Fees & Charges
Fees and charges associated with business loans:
- Processing Fee: A one-time fee charged by the lender to process the loan application.
- Prepayment Charges: If you repay the loan before the agreed tenure, some lenders might levy a prepayment fee.
- Late Payment Fee: If you miss an EMI payment, a late payment fee could be applied.
- EMI Bounce Charges: If your EMI payment bounces due to insufficient funds, the lender may charge a fee.
- Documentation Charges: These cover the cost of document verification and processing.
- Secure Fee: For loans secured against assets, a fee might be charged for asset valuation.
- Stamp Duty: Applicable for certain loan agreements, it is the duty on legal documents.
- Legal and Valuation Charges: For secured loans, these charges cover legal and asset valuation costs.
- Loan Cancellation Charges: If you cancel the loan after applying, a fee may be imposed.
- Loan Conversion Charges: If you switch from a fixed to a variable rate, or vice versa, a fee might apply.
- Cheque Swap Charges: For changing the ECS or PDC (Post-Dated Cheque) mode of repayment, a fee can be charged.
- Amortization Schedule Charges: Some lenders might charge for providing an amortization schedule.
- Loan Rescheduling Charges: If you request a change in the loan repayment schedule, a fee might be applicable.
- NOF (No Objection Certificate) Charges: A fee for obtaining a NOC when you repay the loan in full.
- Service Tax/GST: Applicable taxes may be added to the loan amount.
It’s crucial to review and understand these fees and charges before finalizing a business loan agreement.
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How to Apply Business Loan Online?
Applying for a business loan online is a streamlined process. Here’s how you can do it:
- Research and Compare: Research various lenders and their business loan offerings. Compare interest rates, fees, loan terms, and eligibility criteria to find the best fit for your business.
- Choose the Right Loan: Select the type of business loan that aligns with your needs, whether it’s for expansion, working capital, equipment purchase, etc.
- Check Eligibility: Review the lender’s eligibility criteria. Typically, criteria include the business’s vintage, turnover, profitability, credit score, etc.
- Gather Documents: Prepare the necessary documents like business registration proof, financial statements, income tax returns, bank statements, KYC documents, and any other documents the lender requires.
- Visit Lender’s Website: Go to the lender’s official website to apply. Look for the ‘Apply Now’ or ‘Get Started’ button.
- Fill Application Form: Complete the online application form. Provide accurate information about your business, financials, personal details, and loan requirements.
- Upload Documents: Upload the scanned copies of the required documents. Ensure they are clear and legible.
- Loan Amount and Tenure: Specify the loan amount you need and the desired repayment tenure.
- Check Terms and Conditions: Read and understand the terms and conditions, interest rates, fees, and charges associated with the loan.
- Submit Application: Review the application form and documents you’ve uploaded. Once everything is accurate, submit the application.
- Verification and Approval: The lender will review your application and documents. They might contact you for further verification or clarification.
- Loan Approval: If your application is approved, you will receive a loan offer with the terms and conditions.
- Accept Offer: Review the loan offer carefully. If it suits your requirements, accept the offer. This might involve signing the loan agreement electronically.
- Disbursement: After accepting the offer, the lender will initiate the loan disbursement. The funds will be transferred to your designated bank account.
- Repayment Setup: Set up the repayment mode (EMIs) as per your chosen plan. Make sure your bank account has sufficient funds for the EMI deductions.
- Remember, the online application process might slightly vary between different lenders. Ensure you’re using the official website to avoid scams. Always read the fine print and understand the terms before proceeding.
Types of Business Loans in India
Different Types of Business Loans Explained:
- Unsecured Term Loans: Lenders provide these loans to MSMEs without requiring collateral. These loans support various business needs like expansion, technology upgrades, and cash flow requirements.
- Secured Term Loans: Offered against collateral like property, existing business assets, or financial securities. Collateral provides security for the loan.
- Unsecured Overdraft Business Loans: A collateral-free credit line facility allowing businesses to withdraw funds from their current accounts within a set limit, even with a zero balance.
- Secured Overdraft Business Loans: Offered to existing customers maintaining accounts with the lender. Credit line is secured against property or financial securities.
- Professional Business Loans: Tailored for self-employed professionals like doctors, architects, CA/CS, etc. Used for business needs, expansion, office premises, equipment, etc.
- Bill Discounting: Businesses get early payment against outstanding invoices. Lender deducts a discount/commission and collects full payment from the customer on the due date.
- Machinery Finance: Credit facility to purchase machinery and equipment for business operations.
- Purchase Financing: For manufacturers, traders, and service providers to pay for raw materials and goods purchased from suppliers.
- Working Capital Loans: Finance for day-to-day business needs such as raw materials and employee wages.
- Letter of Credit (LC): Payment guarantee for businesses in international trade, minimizing credit risk.
- Merchant Cash Advance/Point of Sales: Available to SMEs engaged in online sales or using Point of Sale machines. Repayment is directly deducted from online sales or sales made through POS machines.
Obtain Business Loan
Here is a simple guide to let you know the concept thoroughly and get yourself prepared for obtaining a business loan from the following five steps:
1. Purpose for loan
The main thing to remember is why you need a loan. The below points may help you to decide the purpose of obtaining a loan.
- Starting a new business- If you are starting a new business then you may be short of funds to establish your business. For such purposes, you may apply for a business loan. In such cases, you may apply for a microloan or a business credit card.
- New Asset/Equipment- There are also equipment loans available. This loan can help to purchase new plant and machinery, equipment, furniture, and various assets for the business. It is a mortgage loan that is secured by equipment and so if you fail to repay the loan, the lender may seize it.
- Meet daily expenses- If you are facing problems with cash outflows then a short-term loan can be useful. Even this can be useful in managing day-to-day expenses such as payroll, rent, etc. A working capital loan can be obtained.
- In need of a small amount of money- Microloans can be obtained if you are in need of a small amount of money. Microloans are smaller loans for loan amounts of less than $1,00,000 USD. The U.S.Small Business Administration (SBA) had a microloan program.
2. Eligibility
The requirements for business loans may vary. The points to be considered for small business loan application are-
- Credit score- The lender for its safe side may observe your personal and business credit scores. This will help the lender to assure that you will repay the loan amount. If your credit score is high then your chances are high for approval for a business loan and the interest rate may also be low.
- Security- The lender asks you to pledge the asset whether it be collateral or personal. That means in collateral, equipment, or inventory is pledged and in personal guarantee, a business loan is secured with your home, savings, and personal assets so as to secure the amount the lender has provided you as a loan. Any default in repayment of a loan may seize your security.
- Income- Before applying for a loan, check your revenue if you meet up with the expectations.
- Time in business- For obtaining a loan, a traditional bank’s criteria is that you have to be in business for 2 years whereas there are some online lenders that can approve loans for businesses operating for less than 6 months.
3. Business loan lenders
There are a few types of lenders from which a loan can be obtained.
- Traditional banks- Obtaining a loan from traditional banks gives you the advantage of low-rate interest. These banks offer loans to well-qualified applicants at a low rate of interest as compared to other lenders. But at the same time, the main disadvantage of obtaining a business loan from traditional banks is that it is based on your credit scores. Bad credit scores are not approved. Processing time is very hectic in traditional banks.
- Online Lenders- There are different types of loans offered by online lenders such as microloans, term loans, lines of credit, and merchant cash advances. The advantage of obtaining a business loan from online lenders is that their documentation requirements are less than traditional banks and the disadvantage is they offer a higher rate of interest as compared to others.
- Microlenders- Qualified applicants can obtain micro-loans from microlenders for up to $50,000. They are not-for-profit organizations. Even their requirements are less.
4. Documentation
The following list of documents your lender will advise you to furnish for obtaining a business loan.
- Profit and loss statements
- Financial statements
- Personal tax returns
- Business tax returns
- Business licenses
- Articles of incorporation
- Personal bank statements
- Business bank statements
- Business plan
- Building lease
5. Submission
This is the final and last step i.e. submitting your loan application. If you have chosen an online lender then the application is to be submitted online whereas in person it is submitted depending on the type of lender you have chosen. A lender may need the following information-
- Your name
- Your business name
- Loan purpose
- Desired loan amount
- Social Security Number
- Business Tax ID
- Annual income/revenue
After submitting the loan application, a loan approval decision is received from the lender after a few days. Approval of a loan is given by the lender by sending a loan agreement to sign and then the loan amount is issued.
Click to Obtaining A Business Loan
FAQs
What is a good credit score to get instant business loans?
A good credit score to get instant business loans is typically above 750.
How to choose the ideal repayment tenor for business loans?
The ideal repayment tenor for business loans depends on the borrower's financial situation and business needs. A longer tenor may result in lower monthly payments but higher interest costs, while a shorter tenor may lead to higher monthly payments but lower interest costs. It is recommended to choose a tenor that aligns with the business's cash flow and revenue projections.
What is the impact of GST on business loans for new businesses?
The implementation of GST has had a mixed impact on business loans for new businesses. While it has simplified the tax structure and reduced the tax burden for some businesses, it has also increased compliance costs and reduced the availability of certain tax benefits. Lenders may also consider GST compliance while evaluating loan applications.
What is the minimum turnover requirement for a loan to start a business?
The minimum turnover requirement for a loan to start a business varies depending on the lender and the type of loan. However, most lenders require a minimum turnover of Rs. 10 lakhs to Rs. 50 lakhs per annum for unsecured business loans. For secured loans, the turnover requirement may be higher.
Which loan is best for business?
The best loan for a business depends on its specific needs and financial situation. For example, a term loan may be suitable for long-term investments, while a working capital loan may be more appropriate for short-term cash flow needs. It is recommended to compare the terms and conditions of different loans and choose the one that offers the best value.
How can I get a business loan quickly?
To get a business loan quickly, borrowers can consider applying for loans from digital lenders or NBFCs partnered with Vakilsearch that offer fast processing and disbursal.
What is the interest rate of 30 lakh business loan?
The interest rate of a 30 lakh business loan depends on various factors such as the borrower's credit score, business financials, and collateral. Generally, interest rates for business loans range from 9% to 24% per annum.
Who is eligible for MSME loan?
Micro, Small, and Medium Enterprises (MSMEs) are eligible for MSME loans. The eligibility criteria may vary depending on the lender, but typically include factors such as the business's age, turnover, and credit score.
Which govt loan is best?
The best government loan for a business depends on its specific needs and eligibility criteria. Some popular government loan schemes for MSMEs include the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme, the Stand-Up India scheme, and the Pradhan Mantri Mudra Yojana (PMMY).
What is MSME loan interest rate?
The MSME loan interest rate varies depending on the lender and the type of loan.
Can I get a loan for a startup business?
Yes, borrowers can get a loan for a startup business. However, lenders may require additional documentation and collateral to mitigate the higher risk associated with startups.
Who cannot apply for MSME?
Entities such as trusts, cooperatives, and NGOs cannot apply for MSME loans. Additionally, businesses engaged in activities such as gambling, speculation, and illegal activities are not eligible for MSME loans.
What is the maximum amount of a business loan?
The maximum amount of a business loan depends on various factors such as the borrower's creditworthiness, collateral, and business financials. Generally, lenders offer business loans ranging from Rs. 50,000 to Rs. 50 crores or more.
How can I start a business without money?
Starting a business without money is challenging but not impossible. Borrowers can consider bootstrapping, crowdfunding, or seeking support from government schemes such as the Startup India program or the Stand-Up India scheme. It is also important to have a solid business plan and strategy in place to attract investors and customers.
Conclusion
For obtaining a business loan, you may contact Vakilsearch. It is the largest legal service platform. They deliver a good response regarding your legal queries.
