Business Loan

  • Businessman tends to earn more money by starting his own business venture. Business loan plays an important role to provide financial support to the business. Also, it reduces the burden on the business owner.
  • The problem of funding of business can be easily solved by securing funds from bank’s beneficial schemes of business loans.
  • Therefore, businesses can secure the business loan amount from banks. A business loan is a loan specifically borrowed for business purposes.
  • Like all other loans, it involves
    • The creation of a debt
    • Repayment with interest.
  • Also, the banks need the information about how the business intends to use the borrowed money.
  • Therefore, business owners must make sure to have a clear outline of how the money will be spent.

Functions of business loan

There are various functions of business loan some of which are mentioned below

  • A business loan acts as a borrowed capital by the owners of the business from the banks.
  • This loan can be applied by the companies toward expenses that they are unable to pay for themselves.
  • Also, the business owners can use the business loan to pay for the salaries and wages of the employees.
  • It is a borrowed fund that the company can put toward office supplies.
  • It can be also used for buying inventory for the business and various other business projects.

Types of business loan

Business owners have a variety of business loan options to choose from. Generally, banks are the most popular leading source among the other lenders. And banks provide different kinds of business loans. However, securing a loan from a bank can be a difficult task. Also, you need to know that banks are tightening their lending policies due to the economic downfall in many countries. This makes it more challenging for a business medium size business owner to receive financial assistance from bank loans.

Short Term Loan

  • A short-term loan is the type of business loan which can be repaid within one year.
  • The short-term loan is secured. It will be preferable if the borrower repays the money on time others may take a huge cost.
  • Short-term loan strengthens the financial condition of the business.

Inventory Financing

  • It is a short-term or a line of credit loan to the company by the banks.
  • The purpose of inventory financing is to enable the company to purchase products or raw material for sale.
  • These products and inventory serve as collateral for the loan.
  • It is useful for businesses that have to pay their suppliers in a shorter period of time. It acts as a useful solution to seasonal fluctuations in the cash flow of the business and help in achieving higher sale volumes.

Online seller finance

  • Because of the reason that this type of business loan known as online selling is growing exponentially, there is an omnipresent demand for high liquidity.
  • Online seller finance has made its place in India as a good option for the business loan, especially for the e-commerce merchants.
  • B2C (Business to Commerce) and B2B (Business to Business) marketplace is ahead of this competition and diversifies into new product categories with the help of these customized credit solutions available to them.
  • This is collateral-free business funding which ensures you have liquidity in the swiftest manner possible.

Equipment financing

  • Equipment financing is a method of extending capital to businesses to acquire equipment for the business.
  • It is a common tool used by lots of companies.
  • It recovers business program and helps in improving
    • Cash flow, and
    • Working capital
  • It typically involves a bank giving business finance that is secured by a part of the equipment.
  • It is useful for those businesses that are struggling for their funding.

Invoice Financing

  • Invoice financing is a way for businesses to borrow money on the amount due from the customer.
  • It improves
    • Cash flow
    • Pay employers and suppliers
    • Reinvest in operations and growth earlier than they could if they had to wait until the customer paid them.
  • The owner pays a percentage of the invoice amount to the lender as a fee for borrowing.
  • It can be structured in several ways, most commonly factoring or discounting.
  • A Business could use invoice discounting which is similar to invoice factoring except for that business, not the lender.
  • With Invoice discounting, the lender advances the business up to 95% of the invoice amount.

Merchant cash Invoice

  • Merchant cash invoice is not a loan but it is an advance payment against the business’s future income.
  • The cash advance owner gives you a lump sum, which is to be repaid by using a percentage of daily credit card receipts.
  • It is a better option for those if you have poor credit.
  • A merchant cash invoice is a way to finance a small business.
  • Merchant cash invoice provides us a quick solution for a common inventory problem and leverage revenue-based collection for new ideas.

Business loan versus Personal loan

  • Personal loans are those which are given to the individuals and not businesses.
  • Whereas a business loan is a loan that is specifically intended for business purposes.
  • There are a number of the different types of business loan, which are suited to the requirements of different types of business such as
    • The bank loans
    • Mezzanine financing
    • The asset-based financing, and
    • Invoice financing

Related Article- Business loan vs. Personal loan

Values

  • Personal loans that are related to most of the people are of smaller value.
  • The bank only intends to assess the ability to make the repayments that are set out in the terms and conditions. This can thus be an advantage or a disadvantage depending on the personal circumstances.
  • Whereas, business loans can typically be of much higher value than personal loans unless the borrower takes out a sizeable mortgage.
  • While some of the small business loans at the lower value end.

Process

The process for a business loan from a bank is quite a long and detailed process with an extensive application as and when they are compared with personal loans.

Documentation

  • The credit report, the tax returns, and pay stubs are the only documents that are necessary for a personal loan.
  • However, it is necessary to bring a financial statement for the past three years in addition to the other documents to get a business loan.
  • The vast majority of business loans do not require a guarantor to approve the ability of a client to repay the credit.
  • Though in case the business takes out a loan, its owner signs the loan and serves as its guarantor.

The significance of business loan

  • Business loans help businesses having a chance at success.
  • Business loans are always in high demand, but every company that applies for a loan does not receive one.
  • When a business owner applies for a business loan
    • The lenders evaluate the company’s history carefully
    • The amount of debt that the company has, and
    • Whether the business seems to be risky or not.
  • The risk of the lender can increase when
    • The borrower is a new startup company, or
    • If the loan is unsecured

Tax benefit under the business loan

  • The business loan interest is the addition of the amount that the borrowers are required to pay to borrow the money. The person can claim the various tax benefits under the business loan.
  • It is a fee that is paid to the lending banks for allowing the usage of the fund.
  • However, there are some tax-deductible expenses.
  • Tax-deductible expenses are ordinary expenses that are beneficial for businesses to generate income. In other words, these expenses may be reduced from the gross revenue to lower the taxable income.
  • However, the interest which is paid on the loan is deductible, which helps to lower the burden of taxes for the company.
  • Know the interest rates, processing fees, and also other terms and conditions which are important to avail the loans.
  • The tax authorities allow the tax benefits to the companies if they avail of the business finance.
  • The interest which is paid for the servicing, which is the borrowed amount, is generally deductible from the gross income.
  • This amount is paid through the business income as a service fee for using the borrowed funds.

Other benefits of Business Loans

There are various benefits of business loan

Competitive Interest Rates

  • There are various banks and certain NBFCs, that provide business loans at competitive interest rates.
  • The financial institution also provides a business loan to small and medium businesses in India
    • At very competitive interest rates
    • Nominal processing fees
    • With absolutely no hidden charges.

Accessible and Convenient

  • As per convenience promoters offers different repayment options. They may work out a repayment plan as per the business cash flows to avoid facing financial difficulties while servicing the loan.
  • Monthly installment can be lower or increased by owners as per the profitability or choose bullet payments to periodically repay the amount.

No Collateral Required

  • No income or collateral documents need to submit to avail of the loan.
  • A property or land must be owned by the borrower for a 100% loan disbursement.
  • For a small business start-up, these loans help to meet their business requirements and sustain the progress.

Flexibility

  • According to the requirement, the owner can avail of the loan.
  • Many companies can choose term loans to meet the fund requirements in the short to long-term.
  • They may choose for working capital loans to meet the operational expenses of the business.
  • An overdraft facility whereby promoters may overdraw the current accounts as per the agreed terms and conditions.
  • The flexibility makes it easier for promoters to avail of a loan for the business facility.

Short-term option

  • Businesses that look for their fund requirements can opt for this loan, this meets their requirements to fill a short-term financial gap.
  • Flexible loan options are depending on the size of the business-like 100% disbursement, 70% payout (if shown company tax return), etc.
  • This makes it easier for businessmen to expand their business and to sustain the cash flow.

Eligibility Criteria for Business Loan

Although different banks do not have exactly similar criteria. However, the basic criteria are more or less the same.

 Businesses will have to furnish these details

  • Business Plan for the utility of the money
  • Cost of running the business
  • Revenue generation
  • Plan to repay the loan

 Other requirements

  • People should be of 25 to 65 years of age.
  • The business should have been continuing for at least the last 3 years.
  • The business owners should be filing proper Income Tax Return for minimum Rs 3 Lacs rupees.
  • Banks also consider the profitability of the business in the last 2 years
  • Businesses should have a positive net worth.
  • Minimum turnover of Rs.40 Lacs rupees for a partnership firm, Proprietorship, Pvt. Ltd. Companies, and Trusts are compulsory.

Attach the following documents

  • Pan Card and Address Proof of the company and its promoters
  • Last three year’s audited balance sheet
  • Copy of Bank Account statement( statements of last 12 months)
  • Last three year’s IT Return
  • Sales Tax Return of the business(last three years)
  • Copy of Bank Account statement.

A business loan for Women Entrepreneurs

Especially for women entrepreneurs who are willing to grow their business in rural areas, there is an adequate need to help their businesses to grow.

However, to encourage women entrepreneurs in India the Indian government has made many financial subsidy schemes available through leading banks across the country such as

  • Bharatiya Mahila Bank
  • Mahila Coir Yojana
  • Stree Shakthi
  • Cent Kalyani Scheme
  • Mahila Udyam Nidhi Scheme

However, for more information regarding these schemes, you can visit the government website: http://dcmsme.gov.in/schemes/wenterpre.htm