What is a Business Loan – Eligibility, Interest Rates and Benefits

A business loan is a financial product offered by banks, financial institutions, or alternative lenders to provide funds to businesses for various purposes. It is a type of debt financing where a business borrows a specific amount of money and agrees to repay it over a predetermined period of time, typically with interest. If you wish to know more about a business loan and what you need a business loan for, keep reading this article to find out.

Related read: Personal Loans for Self-Employed in India

Types of Business Loan

Several types of business loans are available to cater to different financial needs and circumstances. Here are some common types of business loans:

●       Working Capital Loan

●       Term Loan (Short & Long-term Loan)

●       Letter of Credit

●       Equipment Finance or Machinery Loan

●       Bill/Invoice Discounting

●       Overdraft Facility

●       POS Loans or Merchant Cash Advance

Working Capital Loan

A working capital loan is a type of business loan that provides funding to cover a company’s short-term operational expenses, such as payroll, inventory purchases, rent, utilities, and other day-to-day operational costs. It is specifically designed to help businesses manage their cash flow and ensure smooth operations.

Working capital represents the funds needed for a business to meet its immediate obligations and sustain its operations.

Term Loan

In India, a term loan is a type of business loan provided by banks, financial institutions, and non-banking financial companies (NBFCs) to support various business purposes. Term loans are a popular form of financing for businesses in India and are available for both small and large enterprises. These loans can be categorized into short-term, intermediate, and long-term. The borrower needs to repay it at regular intervals for a set period of time.

Letter of Credit

A Letter of Credit (LC) is a financial instrument commonly used in international trade transactions. It is a written commitment issued by a bank, at the request of a buyer (importer), to guarantee payment to the seller (exporter) upon the fulfillment of certain conditions. Since many enterprises do business overseas, they require a guarantee of payment. A letter of credit can be useful in such situations.

Equipment Finance or Machinery Loan

Equipment finance refers to a type of financing that specifically focuses on providing funds for the acquisition or leasing of equipment for businesses. It allows businesses to acquire the necessary equipment they need to operate or expand their operations without having to make a large upfront payment. These loans also provide business tax benefits.

Bill Invoice/Discounting

Bill invoice discounting, also known as invoice financing or invoice factoring, is a financing arrangement where a business sells its accounts receivable (unpaid customer invoices) to a financial institution (factor) at a discount. This allows the business to access immediate cash flow instead of waiting for customers to pay their invoices on their original due dates.

It’s important to note that bill invoice discounting involves a financial institution purchasing the invoices at a discount, which means the business will receive less than the total face value of the invoices.

Overdraft facility

An overdraft facility for businesses is a type of financial arrangement provided by banks that allow businesses to withdraw funds from their business bank account in excess of the available balance. It provides businesses with short-term access to additional working capital to meet their cash flow needs or handle unexpected expenses.

POS Loans

Also known as Point-of-Sale loans or merchant financing, is a type of financing that allows customers to obtain instant loans at the point of sale, typically for making purchases. These loans are facilitated by the merchant or retailer in partnership with a financial institution or lending platform.

In addition to these, businesses can also get loans under various government schemes like Startup India, Pradhan Mantri Mudra Loan, etc. Head over online to check out more.

Benefits of Business Loan

Business loans offer several benefits to businesses. Here are some common benefits of obtaining a business loan:

• Access to Capital to start, operate, expand, or invest in their operations.
• Business loans can help businesses manage their working capital effectively. They can be used to bridge short-term cash flow gaps, cover operational expenses, pay suppliers, manage inventory, or handle unexpected expenses.
• Loans can enable businesses to pursue growth opportunities.
• A business loan can provide stability and flexibility to a business by ensuring a steady flow of funds when needed.
• Successfully repaying a business loan helps establish and strengthen the business’ credit history.
• Retain full ownership and control of their company instead of seeking additional investors or partners.
• In certain cases, interest paid on business loans may be tax-deductible, providing potential tax benefits to the business.

It’s important for businesses to carefully consider their specific financial needs, evaluate the costs and terms associated with different loan options, and assess their ability to repay the loan before applying for a business loan. Additionally, seeking advice from financial professionals or consulting with lenders can help businesses make informed decisions regarding loan options and their potential impact on the business’ financial health.

How to Apply for Business Loan?

Follow the below steps to apply for a business loan:

• Determine Your Loan Purpose.
• Research different lenders and loan products to find the ones that align with your needs.
• Compare interest rates, repayment terms, fees, and eligibility requirements.
• Prepare your documentation like business plans, financial statements, tax returns, etc.
• Review your credit profile for any red marks.
• Draft a loan proposal that outlines your loan request.
• Contact the chosen lender or visit their website to initiate the application process.
• Fill out the loan application form, providing accurate and detailed information about your business, financials, and personal details.
• If the loan application is approved, carefully review the loan terms and conditions.
• Upon acceptance, the lender will disburse the funds to your designated account.

Eligibility Criteria for Business Loans

The following pointers are evaluated by lenders before approving a business loan application:

• Business type and age
• Credit History
• Revenue and Financial Performance
• Collateral
• Stability of the business
• Existing debt and payment record
• Legal Compliance

The terms can vary for different lenders. Please check with the lender to know more.

In case, you have a very small business that needs instant capital, you can also opt for a personal loan. Airtel Flexi Credit gives business owners like you the option to choose any loan amount up to Rs. 9 lacs, adjust their EMI amount, and loan tenure as per their needs. You can check out more about this on Airtel Personal Loan official website.

Also read: What is the maximum and minimum tenure for a personal loan?