A business loan in India is offered by many lenders. A business loan is said to be the best friend of a business owner since it helps them at the time when he needs finances. A business, be it small or big, many times witnesses paucity of funds and requires external financial support. Equity financing is not liked by every business owner and so they look forward to debt financing.
A business may require external funds for varied other reasons as well apart from a paucity of funds. For instance for buying or upgrading machinery. It is not possible for a business to take out funds from the cash cycle to buy or upgrade machinery since it can affect the liquidity of the business. Hence, a business loan in India is the best option. Significantly, it is worth mentioning that the funds availed under business loan can only be used for business purpose and not personal expenses.
What are the Different Types of Business Loans?
also read: Different types of business loan in india
There are different types of business loans in India that a small business owner can avail. The major two categories of the same are secured business loan and unsecured business loan. The other types of loans for business fall under these two.
Secured Business Loan: As the name suggests, the secured business loans are secured or backed by an asset as collateral. They are also called collateral business loans. The business owner has to offer an asset to the loan lender to avail this type of loan for the business. In case the borrower defaults on repaying the loan, the lender will have permanent possession of the asset. He can sell off the asset to recover the loses.
Unsecured Business Loan: As opposed to secured business loans, unsecured business loans are offered without collateral. These are called collateral-free business loans. As not all small businesses in India can offer collateral, unsecured business loans are the best option for them. These type of loans are approved on the basis of the borrower’s creditworthiness.
The following types of business loans are differentiated on the basis of the purpose for which they are availed. Significantly, they can be secured or unsecured in nature.
Machinery Loan: As the name suggests, a machinery loan is availed to upgrade or buy new machinery or equipment for business purpose. This type of business is also called an equipment loan. A machinery loan is very helpful when the business cannot take out cash from cash cycle but new equipment or machinery is important for better production and operation.
Working Capital Loan: A working capital loan is availed to ease the liquidity and working capital of the business. Working capital includes paying utility bills, salaries, wages, etc. A business may require urgent funds to pay these bills however may not have received its outstanding bill. So, a working capital loan turns helpful i sch scenarios.
Flexi loan: A flexi loan is like a credit card. The loan lender approves a loan limit for a fixed time period to the borrower. During that period, the small business owner can use the funds at any point in time. However, the funds can be used up to the sanctioned limit only. Also, the business loan interest would be charged just on the amount utilized.
Capital Loan: A capital loan is availed to increase capital for the business. This type of small business loan is availed for growth and expansion purposes.
Term Loan: A term loan, as the name suggests, is availed for a specific term and tenure, usually for short term.
Business Loan for Women: A business loan for women is offered only to women entrepreneurs. This type of loan is specifically designed for women-owned businesses.
Who is better to avail a Business Loan in India from – an NBFC or Bank?
A small business loan in India is offered by banks and NBFC. Both have few advantages and disadvantages and so, the borrower often gets confused. Read the following comparison to make a sound decision:
Banks offer offline loan application. The borrower is required to visit the bank branch to gather information regarding loan and fill the application and apply for a loan.
NBFCs offer an online application form. The small business owner can fill the application form online at any time and from anywhere. In addition, all information related to loan is available online.
Banks require a long list of documents to support a loan application.
NBFCs require a minimal list of documents which is only limited to KYC documents. They, in fact, offer paperless loans since the business owner can upload the PDFs of the documents online.
Banks lay strict eligibility criteria. And so, very few loan applications are approved.
NBFCs lay basic eligibility criteria. They work towards ensuring that all small businesses in India get access to a loan for the business.
Banks take a lot of time in processing loan application. They usually take a couple of weeks to a month to disburse the loan.
The NBFCs process application comparatively faster and disburse loan within a few days.
What is the Business Loan Eligibility?
To get the business loan in India approved from an NBFC, the business owner must fulfill the eligibility criteria laid by the lender. It is worth mentioning that the eligibility criteria differ from one NBFC to another. However, the following is a generic list that can give an idea of NBFC business loan eligibility criteria:
ITR: The income tax filed by the business owner in the previous year must be more than INR 2.5 lakhs. This provides the information related to the earnings.
Turnover: The business must enjoy an annual turnover in the last year of at least INR 10 lakhs. This would convey that the business earns enough to repay the loan.
Business Vintage: No lender would ever want to risk their money. NBFCs usually offer business loan to business who is in operations for more than 2 years. This represents that the business is profitable enough to repay the business loan.
CIBIL Score: A CIBIL report is the representation of financial habit of the business owner. Higher the CIBIL score, higher the borrower is responsible.
What are the Business Loan Documents?
As with business loan eligibility, the business loan documents as well differ from one lender to another. As said earlier, an NBFC requires a minimal list of documents. The following is a generic list of documents for a business loan:
PAN Card: A PAN card of the business owner or the partner(s). Issued by the IT department, PAN card is considered as an imperative business loan document.
Address Proof: The address proof, such as electricity bill or passport, along with the address proof of the office premise. The leasing deed of the office premise can also be provided as proof along with the identity proof of the owner.
Bank Statement: The bank statement of the previous 12 months are also important documents. They represent the financial capability and behavior of the borrower. A good credit balance in the bank account is a must.
Income Tax Return: The ITR of at least 2-3 years. It serves as income proof.
Adhar Card: Since the government had mandated to link adhar card with a bank account, it also is required. Adhar card helps in availing business loan faster.
What considerations should you make before availing a Business Loan?
Before applying for a business loan in India, the borrower must consider a few things in order to ensure that he is making a sound decision. Have a look at the important business loan considerations:
Before applying for a business loan in India, you are required to ensure that your CIBIL score is equal to or more than what the lender requires. Notably, every disapproved loan application impacts negatively on the CIBIL score. Also, the lenders tend to offer business loan at low interest rate to the borrowers with high CIBIL score since it lowers down the risk of defaulting.
Applying loans to multiple lenders also impacts negatively on the CIBIL score. A lender would only check your CIBIL score when you have applied for a loan with him. And with multiple loan lenders (with whom you have applied for loans) checking your CIBIL score, it will represent you are credit hungry.
Before applying for a loan for business, it is important to carefully assess the requirements. While a loan of amount less than what was required would be of no use, a loan of amount more than what was required required will cost extra interest.
Read the loan agreement carefully before signing. It is important to understand all sections and clauses in order to make a good decision. The small business owner can also take the help of a lawyer.
How to Improve CIBIL Score?
A CIBIL score is a 3-digit number that represents the holder’s financial behavior and creditworthiness. All lenders consider CIBIL score before approving the loan application. And so, it is important for you to have a high CIBIL score to get your application for loan approved in the first go. The following points will help you increase your credit/CIBIL score:
Payment Schedule: It is important to keep a track of payment schedule in order to pay all dues on time. A single cheque bounce or EMI bounce instance can bring CIBIL score down. All bills must be paid at least 5 days before due dates.
Credit Utilization Ratio: Not eating up the entire credit limit is a good financial habit and it reflects positively on credit report. An ideal practice is to never use more than 50% of the limit.
Multiple Loans: As conveyed earlier, applying for multiple loans will result in multiple lenders checking your CIBIL score. This will bring the score down.
CIBIL Report: There have been many instances where some wrong information is entered in the CIBIL report. So, it is important for a business owner to check CIBIL report at regular intervals. And if any wrong information is entered, get it corrected from Trans CIBIL.
How to get a Business Loan in India Faster?
Also read: how to get a business loan?
Most loan lenders these days are using technology-enabled platform that has enabled them to provide their services online. So, the small business owner can apply for a business loan in India from his office or home. Also, it is not necessary for him to fill the loan application in the morning or during working hours. But he can fill at any time even midnight. The following are the steps for the same:
Step 1: Decide on the lender and visit his website. Fill the loan application form on their website with correct information. Some lenders also offer their own mobile App, you can use it to apply for a business loan in India.
Step 2: After applying for a business loan, upload the PDFs of the documents required by the lender. The PDF format of the document will make it easier for the lender to process your application faster.
Step 3: Lastly, wait for approval! If you have applied for an NBFC business loan, then your application will be processed faster. In addition, they will also disburse the sanctioned loan amount within a few days. However, if your loan application is rejected, a representative from NBFC will share you the reason for the same over an email or text message.
A business loan in India can be helpful for a small business in a number of ways. And now that you know everything about a loan for a business in India, you can take a sound decision and apply for a business loan conveniently.