Considering the loan for a business can have all kinds of opinions. Entrepreneurship is the most creative thing which is not behind in the race in the era of innovation. Business Loans are very common, particularly for small and medium scale endeavors. Mostly the banks in India provide the business loan to:

  • Proprietorship firm
  • Partnership firm
  • Private limited companies, and
  • Public limited companies

Features of all the loans are almost similar. However, the rate of interest, terms, and conditions of the loan differs from bank to bank and NBFCs. An invoice finance guide for a business loan can also be helpful.

Factor affecting the amount of business loan

Basically, there are four factors which directly affect the amount of business loan

Credit Rating

  • Credit rating or CIBIL score of
    • Individual promoters
    • Directors, and
    • Proprietors
  • It is an assessment of the creditworthiness of the debtor. It is more important especially in the case of
    • Business
    • Government, but
    • Not an individual consumer
  • Credit rating is done on the debtor’s ability to repay the amount  agency is always done by a credit rating agency such as
    • CRISIL,
    • ICRA
  • Factors on which the ability to repay the amount is based on
    • Credit card payment of the applicant
    • Another loan is taken by the applicant (if any), etc.

Cash flow status

  • The bank must check the cash flow status to analyze the repayment capacity of the borrower.
  • If the cash flow status is not reliable the bank might not provide you the loan.
  • Applicant should clearly mention that haw they have planned to use the loan amount and how they are going to repay that.

Types of business

  • To take the business loan the type of business plays an important role.
  • If the company is new or the bank is newly established so the entrepreneur might face the problem of getting a loan from the bank.
  • The amount of the loan depends on the type of business. On different types of business, you can get different types of business loans.
  • If your business can earn more profit then your eligibility to receive a loan will automatically increase.

Collateral

  • Collateral is the fastest way to receive the loan. It is a secured loan. The risk of the bank reduction in the collateral and the eligibility of taking the loan will increase as an applicant.
  • Collateral is mostly used in
    • Real property
    • Business inventory
    • Cash saving
    • Vehicle and other assets.

Credit guarantee scheme for micro-enterprises

  • Most of the banks and NBFCs have quite strict procedures for providing business loans. To get a business loan, the applicant needs to provide detailed documents. Detailed documents are important especially when the loan is not covered by collaterals.
  • This might make suffer from the new enterprise. However, there is a method for small businesses to apply for collateral-free loans through (CGTMSE) Credit Guarantee Fund Trust for micro-enterprises for up to INR 1. crore.
  • CGTMSE was set up by the Ministry of Micro, Small, and Medium Enterprise. To support new entrepreneurs by offering a Credit Guarantee Scheme.
  • Credit Guarantee Scheme is based on project growth and reliability and credit rating of
    • The promoters
    • The proprietors, etc.
  • The Credit Guarantee Scheme can be availed on the sanctioned amount of loan. However, it would be payable if the business is declared non-performing assets.

Eligibility Criteria for a business loan

Eligibility criteria can differ from business to business such as

  • People between the age of 25 to 65 are eligible for the business loan.
  • The business should have been continuing for the last 3 years at least.
  • Businesses must have gained a profit in the past 2 years.
  • Record pf proper income tax return
  • Minimum turnover INR 40,00,000 for
    • Proprietorship
    • Partnership
    • Private limited companies
    • LTD Companies
    • Societies, and
    • Trust
  • The business should have a positive net worth. You can apply for a business loan through financial institutions also.

Documents required for the business loan

  • PAN card
  • Address proof of the company
  • Address proof of the promoters
  • Companie’s audit balance sheet for the last three years with Income Tax Return.
  • Sales tax return of business for the last 3 years.
  • Copy of bank account statement
  • Detailed business plan
  • Cost of running the business
  • Structure of the repayment of the loan.

You should be aware of the myths about business loans.