There are nearly 10 types of business loans available in India and they are as follows-

• Term Loans (Short-term, long-term loans)


• Cash Credit


• Overdraft


• Working Capital Loan


• Unsecured Business Loan


• Startup Loan


• Business Loan against property


• POS Loans or Merchant Cash Advance


• Letter of Credit


• Project Loans

Determining how much money you need to borrow for your business involves several steps:

 

Business Plan: Firstly, you need a robust business plan. A business plan will help you understand your business needs better and predict potential expenses and revenues.

Budgeting: Create a detailed budget for your business. Include all potential expenses, from rent and salaries to supplies and utilities, as well as your projected income.

Cash Flow Projection: This is an estimate of the money you expect your business to bring in and payout over a period. It will help you understand how much capital you need to keep the business running.

Consider Unexpected Costs: Always anticipate unexpected costs and include a buffer in your loan amount to cover them.

Existing Resources: Deduct your savings or any existing resources that you plan to invest in your business from the total amount calculated above.

Loan Repayment: Consider your potential to repay the loan. You don’t want to burden your business with debt.

Remember, every business is different, and the amount of money you need to borrow will depend on various factors such as your industry, business size, and location. It might be beneficial to consult with a financial advisor or accountant.

The interest rates and term period may differ depending on the type of business loan you apply for. They could begin from 8% and go up to 30% based on various factors like your credit history, amount of loan, tenure, etc.

The eligibility criteria may slightly differ from one bank to the other. However, to explain the basic eligibility criteria for a business loan, the following factors are crucial-

 

• The individual must be of Indian nationality


• Must have an existing business running for 3 years


• Must possess a decent CIBIL score


• Age limit between 24-80 years


• Must possess KYC documents, including Aadhar, Passport, PAN card, etc.

Improving your chances of getting approved for a business loan involves several steps:

Good Credit Score: A solid credit history demonstrates to lenders that you are reliable and can manage debt effectively.

Solid Business Plan: Banks and lenders want to see that you have a well-thought-out plan for your business. This includes an overview of the business, market analysis, sales and marketing strategies, and financial projections.

Cash Flow and Revenue: Lenders are more likely to approve loans for businesses that have a steady cash flow and strong revenue. This shows that you will likely be able to repay the loan.

Down Payment: If you can make a significant down payment, this can also increase your chances. It reduces the lender’s risk.

Business Experience: Lenders prefer borrowers who have experience in the business they are in or have been in business for a few years.

Complete Application: Make sure all the information in your application is accurate and complete. Any errors or omissions can lead to delays or a rejection.

Remember, every lender has different criteria, so it’s important to do your research and understand what each lender is looking for.

When applying for a business loan, you need to provide the following documents and information:

Business Plan: A thorough business plan gives lenders insight into your business, illustrating your strategy, market analysis, and financial projections.

Personal and Business Credit Reports: Lenders usually check both these reports to assess your creditworthiness.

Financial Statements: This includes balance sheets, income statements, and cash flow statements for the past 2-3 years. If your business is new, you may need to provide projected financial statements.

Bank Statements: Lenders often require both personal and business bank statements to understand your financial behaviour and the business’ cash flow.

Tax Returns: You’ll need to provide both personal and business tax returns for the past 2-3 years.

Legal Documents: These may include your business license and registration, articles of incorporation, contracts with third parties, franchise agreements, and any commercial leases.

Collateral Information: If you’re applying for a secured loan, you’ll need to provide details about the collateral that you’re offering.

Ownership and Affiliations: Lenders will want to know the ownership structure of your business and any affiliations with other companies.

Business Resume: Some lenders may want to know about you (and your management team’s) business experience.

Loan Application Form: Many lenders have their loan application form that you will need to fill out.

Remember, requirements can vary by lender and the type of loan you’re applying for. It’s always a good idea to check with your lender to confirm what you’ll need to provide.

The loan approval may differ depending on the nature of your business loan. It usually takes a few days to a couple of weeks for the business loan to get approved. Certain lenders provide faster processing of small amount loans, whereas, for large loans, it may take a bit longer for documentation and evaluation.

Usually, banks/other financial institutions charge a fee of 2.5-3% on the principal amount for processing a loan application. This fee is non-refundable in nature and it is a one-time cost.

Starting a new business is always a risqué move especially when you do not have a strong financial background. So if you’re planning to go for a business loan, you need to consider several risk factors. You could land in high debts if you default on your loan payments. You could lose collateral, your personal assets could be at risk if you don’t repay your loans on time.

Most business loans do not have a prepayment penalty which means you can repay the loan amount anytime without having to pay the penalty. However, it’s advisable to check with your lender before taking a business loan to be sure of the no penalty on prepayment clause.

If you default on a business loan, your credit score will be impacted negatively and you may not be able to secure any loan in future. Also, if you are repeatedly defaulting on your loan repayments, then the lender may also start legal proceedings to recover the loan amount.

Yes, various government programs such as the Pradhan Mantri Mudra Yojana scheme offers loan amount of up to ₹10 lakhs to micro, small, and medium sized companies to start their business dream.