Alternative lenders are the best options for small businesses which are looking for loans but cannot avail the credit facility from traditional lenders (banks). These lenders provide several types of business loans, ranging from machinery loan to working capital loan. However, the presence of several types of loans and lenders confuses the business owners. Below is the guide to help them choose the best business loan for them.
Before comprehending the types of loans offered in the market and which loan makes for the best option, you need first to assess your needs. The following are the questions that you need to answer to set clear goals before you start the search for the best business loan:
- What are your requirements?
- Why do you need money?
- How long would you take to repay it?
- What is your business vintage?
- What is the current position of the business in terms of finances?
- What is your personal and business credit score?
- Do you have any collateral to hypothecate?
- Are there any outstanding loans on your or business’s name?
After getting answers to all these questions, now it’s time to consider the lenders and loans available in the market and decide which one is the best for your business.
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Types of Business Loan Lenders
- Banks: banks are the traditional lenders that offer secured business loans. Their loan application process is time-taking, and they generally take a month to process the loan application. It is difficult to get approval for bank loans as they are offered at stringent eligibility criteria.
- Alternative Lenders: alternative lenders such as NBFCs are attractive to small businesses. They offer online application and have a fast loan application process where their eligibility criteria are not stringent. They process the application faster and sanction loans in a few days. The positives of NBFCs include that they don’t only depend on the CIBIL score of the borrower, but also take into account the business financials and history. The biggest advantage of lending money from NBFCs is that they offer unsecured business loans.
Types of Business Loans
With the various loan lenders operating in the market, there are numerous business loans as well that you can choose from. These loans are categorized on the basis of their end-use. And as per your requirement, you can choose the best business loan product for your business.
Working Capital Loans
Working capital loans are used to solve short-term financial problems. The businesses in need of money to fund their operations can fulfill their requirement with a working capital loan. This loan is available with both- banks and alternative lenders. The benefit of availing a working capital loan is that it helps in maintaining the business operations, while you search for options to increase revenue.
Equipment/Machinery Loans
In addition to working capital loans, banks and alternative lenders also offer equipment loans. Equipment or machinery loans provide funds to the business for investment in office equipment, machines, computers, tools, or vehicles. Instead of paying a large amount of money, you can buy machinery by making monthly payments towards the loan repayment. One advantage of availing a machinery loan is that it is easier to obtain as the machinery is kept as collateral in most cases. The loan also helps in preserving cash flow as there is no need to make down payment. Besides, it has several tax write-off advantages as well.
Capital Loan
After establishing a successful business, every business owner wants to expand his business. For this, funds are required capital investment. Even after running the business successfully, you may not have enough cash reserves for capital investment. So, you can avail a capital loan to meet your business’s financial requirements. This type of loan is typically availed for long-term, and its loan repayment tenure ranges from 2 years to 5 years; it may vary from lender to lender.
Line of Credit
Line of credit loan is like working capital loan, which is availed to meet day-to-day cash flow needs of a business. This loan is generally not recommended for big or larger purchases. Additionally, the loan is availed for a shorter duration, such as just 90 days. With a line of credit, you can take what you need and repay it in easy installments with interest. Line of credit are unsecured loans and don’t require you to hypothecate collateral. Also, you can build your credit rating with this loan by paying EMIs on time.
Professional Practice Loans
Professional practice loans are designed specifically for professionals, such as businesses in healthcare, legal, accounting, insurance, architecture, and engineering. This type of loan is typically used for purchasing new equipment, renovating office space, or refinancing a loan.
Invoice Factoring
Invoice Factoring is a type of loan where you receive cash in advance from the lender in exchange for your outstanding invoices. As the invoices are collected by the lender, he receives his money along with the fee.
Best Business Loans FAQs
If I apply for an NBFC business loan, What are the documents required?
When applying for an NBFC business loan, the lender will ask you to fill the loan application form and provide the required documents. The following are the documents required by him:
- PAN & Aadhar number
- Personal & background financial statements
- PNL statement
- Business certificate and license
- Previous loan application history
- Income tax returns
- Bank statement
What is the eligibility for business loans?
Every lender wants to ensure that he is lending his money to the borrower who would be able to repay the loan amount with interest on time. Therefore, they have several eligibility criteria through which they verify the eligibility of the borrower. The following is their eligibility criteria:
- ITR of more than Rs. 1.5 lakhs in the previous year.
- Either house or business place should be owned by the business owner
- Business turnover in the previous year should be more than Rs. 10 lakhs.
- House and business office should be separate
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