Business loans are essential steps for entrepreneurs and business owners looking to expand or strengthen their businesses. Whether you’re planning to scale up your organization, purchase new technology to match the pace, or manage unhindered cash flow, a business loan can be highly effective to help attaining your goals. However, when you apply for a business loan, the process for the same can often be daunting as many regulations, assessments, and requirements of documentation have to be fulfilled.
This article will provide a comprehensive guide to help you understand the steps involved in applying for loans for business in India. By carefully planning your assets and staying aware of the financial procedures you can easily obtain loans for your businesses.
Understanding What is a Business Loan
Banks, Non-Banking Financial Companies (NBFCs), or other financial institutions provide a type of financing to businesses, to help them cover their short-term or long-term expenses. There are various repayment terms, varying interest rates, and eligibility criteria that you should know to apply for business loans.
For What Purposes Can the Funds From a Business Loan be Used?
Funds gained from a business loan can be ideally used for varying purposes as listed:
- Buying machinery or equipment for businesses
- Expanding the working and client base of a business
- Managing the working capital of an organization
- Working and investing in marketing or promotional setups
- Research and development sector investments
Why is Business Loan Needed?
It is important to understand why you need a business loan, before starting with the actual procedure for the same. There can be many reasons why your business must require financial help with a loan, and it is best to understand the objectives and set clear goals. Here are a few ways how business loan can help your business.
- If your organization needs growth and is planning to expand into new markets, capital is required.
- Buying upgraded technology and machinery is needed to gain a competitive edge, and the expenses of the same can be met by business loans.
- If your business has a higher-interest debt, loans can help in consolidating it into a single manageable payment.
Types of Business Loans Available in India
To apply for a business loan it is important to understand the various types available in India.
#1. Term Loans:
Term loans are basically big amounts of money that the lender gives to a business for various purposes. Businesses agree to return this money within a specific amount of time or term, as the name suggests. These usually range from 1 to 5 years and are ideal for long-term capital investments like purchasing machinery or heavy equipment.
#2. Working Capital Loans
These loans are for a fixed duration and are lent by banks or financial institutions, to keep things running smoothly. By borrowing from the lender, businesses can manage their operations, wages, and tail spend expenses.
#3. Equipment Financing
If a business wants to invest in and buy machinery or equipment, they can ask for equipment financing loans that cater only to this purpose. The equipment you’re buying usually acts as collateral for the loan, which can be a guarantee for repayment.
#4. Overdraft Facility
This is like having a safety net in the bank account. It allows you to withdraw more than the balance in your account, up to a certain limit. If a business runs out of money it can still make payments with this service. Managing cash flows biome easier for businesses through an overdraft facility.
#5. Invoice Financing
Businesses can borrow against their unpaid invoices through these loans. It is like a short-term solution for businesses dealing with delays in customer payments, as they can manage their cash flows effectively without waiting for customers to pay for the invoices.
Who is Eligible for Business Loans in India?
The overall eligibility requirements are common to apply for a business loan, however, some criteria can vary between lenders.
- Most banks and NBFCs require your business to be operational for more than 2 or 3 years.
- Turnover and profitability of a business should also be ensured as per mentioned requirements by the lenders.
- A reasonable or high credit score is often preferred by lenders to give business loans. Some may require collateral assets against the lending amount.
Documents Required for Business Loans
It is important to remember, that the more transparent and accurate your paperwork is, the easier it will be to complete the procedure and apply for business loans. Some of the common documents usually asked for by the lenders are mentioned below however, you should understand that there may be additional document requirements at times.
- A detailed and outlined business plan should be provided which clearly states the reason behind obtaining a loan, and how your business intends to use these funds.
- Identity and address proofs are commonly asked for completing the KYC of your loan application.
- Income tax returns for the past few years are also to be submitted. It is better to keep them ready and aligned with your balance sheets, through a business income tax calculator.
Process to Apply for a Business Loan
- It is best to begin by understanding the requirements of your business and setting clear goals about how the funds will be used and how much capital is required for each purpose.
- Researching various lenders and comparing their interest rates, loan tenure, and eligibility requirements should be your next step.
- Preparing all the necessary documents and checking for additional requirements such as credit score balance is also necessary for acquiring loans.
- After completing all the requirements submit your application and keep following up for any updates and details.
Interesting Statistics to Understand Business Loans in India
- Business loan interest rates in India typically range from 12% to 22%, depending on the lender you choose and your credit score.
- Loans can range from as low as ₹50,000 to as high as ₹10 crores. This will be based on the size and needs of your business.
- The loan approval process usually takes 7 to 15 business days, depending on the lender and the complexity of your application.
Bottom Line: Business Loans Helping in Efficient Growth and Expansion
With careful planning and essential documents, your business can also avail benefits of loans and lead toward your expected goals. By thoroughly preparing and using financial tools like a business income tax calculator, you can streamline your loan application, and improve your chances of attaining the necessary funds needed to expand and enhance your business. Understand the different types of loans available, and choose the right type that will work well for your organization, leading you to a better financial decision.