Business loan are turning out to be the best friend of the business owners. They are the savior of the businesses when they face a paucity of funds. Nonetheless, business loans are not only required when a business faces a paucity of funds. But also when the machinery requires an up-gradation or when the business witnesses a growth opportunity.
Well, even if you are making a good amount of profits, it is not always possible for you to out take a huge chunk of money from your profits as it can affect your cash cycle. In such situations, you need a small business loan to never let the unavailability of funds affect your business negatively. Notably, the funds availed under a loan for business should only be used for activities related to business.
What are the types of Business Loans?
There are a number of small business loans that a business owner can apply for. The major two categories of business loans are:
- Secured Business Loan: A secured business loan is a credit facility which is only extended by the lender when the borrower hypothecates an asset as collateral. Here, the small business loan is secured by the collateral and so the name secured loans. It is also called as a collateral business loan.
- Unsecured Business Loan: An unsecured business loan is credit facility extended by the borrower entirely on the creditworthiness of the borrower. The loan for a business is not secured with the collateral and hence, are called unsecured business loans. They are also called collateral-business loans for obvious reasons.
There are other types of business loans as well which are classified on the basis of the purpose for which they are availed. They include:
- Machinery Loan: A credit facility availed to upgrade or buy new machinery or equipment is called a machinery loan. The equipment loan is very helpful when the machinery requires an upgradation but you cannot take out any amount from your cash cycle.
- Working Capital Loan: A working capital loan is availed to meet the working capital requirements of the business. There are times when a business witnesses a paucity of funds. Maybe due to a late payment by the clients or any other reason for that matter. The funds availed under this business funding type can be used to pay dues, salaries, wages, utility bills, etc.
- Term Loan: A term loan is availed for a specific term. It can be availed for a short term or long term.
- Capital Loan: A capital loan is availed when a business wants to increase capital This type of business funding is especially beneficial when a business witnesses a growth opportunity.
- Flexi Loan: A flexi loan is a new age loan. In this business funding, a credit limit is approved for the business by the lender. The business owner can use funds up to the limits and would be charged interest only for the amount utilized.
- Business Loan for Women: Many business loan lenders these days are also offering small business loan for ladies. These small business funding are specially designed for women entrepreneurs.
Which is better to avail Business Loans from – NBFC or Bank?
A business owner can avail business funding from an NBFC or bank. Both the business loan lenders have their own set of advantages and disadvantages. However, the best business loan provider in India would be the one with fewer cons. Let’s compare the two:
|Application||Most banks follow the convention loan application process. The borrower is required to visit the branch of the banks to apply for a loan. In many cases, the borrower has to visit multiple times to apply for a loan for the business.||NBFCs are the new age loan lenders – they offer online business loan application form. The borrower can apply online any time and from anywhere. There is no need for the borrower to visit the NFBC’s office.|
|Documents||Usually, banks require a long list of business loan documents.||The business loan documents required by NBFCs are mostly minimal. In fact, there are some NBFCs that offer paper-less business loans.|
|Eligibility||Banks do not want to risk their money and therefore, lay very difficult eligibility for business loans. Very little or say, only 5 in 100 are able to get their loan application approved.||NBFCs have easy eligibility criteria for loans. They even have their own credit evaluation system apart from the CIBIL which evaluates the creditworthiness of the borrower in a holistic fashion.|
|Disbursal||Banks take a whole lot of time to process a loan application. It often takes a month or two to disburse the loan amount approved.||The NBFCs’ processing is very quick and they disburse loan within a few working days.|
|Services||As said earlier, the banks are the conventional medium of availing a business loan.||NBFCs also offer a number of other services, such as customer support, mobile App, etc. They also keep you updated through messages and emails.|
So, it is clearly evident that NBFCs are a better option to avail a business loan than the banks.
What is the Eligibility Criteria for NBFC Business Loans?
In order to get a loan for business approved from NBFC, the borrower must meet the business loan eligibility. Significantly, the business loan eligibility criteria different from one lender to another. However, there are a few common requirements which are as follow:
- Business Vintage: The business should be operating for the last 2 years at least. Without being in operation, the business cannot show its income and turnover which significantly depicts how the business would repay the loan for the business.
- Turnover: The business must have enjoyed a minimum annual turnover of INR 10 lakhs in the previous year. As conveyed in the previous points, no lender would want to risk their money. So, a turnover shows the same.
- ITR: The business owner must have filed the Income Tax Return of minimum INR 2.5 lakhs in the previous year. This also shows the responsible behavior of the borrower.
What are the Documents Required for Small Business Loans?
As the eligibility criteria of every lender are different, so is the business loan documents. NBFCs require a minimal list of documents. The following are the business loan requirements by most of the lenders:
- Address Proof: The address proof of the applicant along with the address proof of the business premise. Address proofs are important business loan documents.
- PAN card: PAN card is mandatory for any financial transaction. It is issued by the IT department and is one among the crucial documents required for the business loan.
- Aadhar Card: The government has mandated to link Aadhar card with a bank Additionally, it is also linked to other documents, such as PAN card, mobile number, etc. Aadhar card is accepted as address proof as well.
- Income Tax Return: Income tax return of at least 2-3 years. It is one important document as it serves as income proof.
- Bank Statement: The bank’s statement of last one year. It helps the lender to determine your spending and repayment behavior. A good credit balance is required for the lender to understand that you are reliable to offer a business loan.
What are the Considerations to make before availing a Business Loan?
There are a few business loan considerations that a business owner must consider before availing a loan for the business. The following are the important considerations:
- Ensure that the CIBIL score is more than the minimum required to avail a loan for the business. If it is below the required threshold, the business owner must first work towards increasing it. With a low CIBIL score, most lenders would deny the loan application and in case any lender approves the loan, he would offer it at the high business loan interest rate.
- Do not apply for small business loans to multiple lenders. Every time a borrower applies for a loan, the lender checks the CIBIL score. And the data of the number of times CIBIL score is checked is stored in the CIBIL report. This shows the credit-hungry behavior and affects the credit score negatively.
- Repay all the already running loans on time. This will help in providing a good repayment track report.
- Read business loan agreement carefully before signing it. Understand all the clauses before singing. You can take the help of a lawyer as well.
- Never apply for a loan amount more than your requirements. Remember, the business loan comes with interest charges.
How to Improve CIBIL Score?
A good CIBIL score is an important parameter on which the loan application is approved or rejected. So, if it is below the required threshold, work towards improving it. A low CIBIL score also affects the business loan interest rate. The following steps will help in it:
- Track of Payment Schedule: Keep a track of payment schedule and pay all the dues on time. A good habit is to pay bills at least 5 days before the due date.
- Credit Utilization Ratio: Never use your credit card up to the limit. This shows credit hungry behavior. A good practice is to never use the credit beyond the 50% of its limit.
- Do not apply for Multiple Loans: Applying for multiple loans brings down the CIBIL score. A good practice is to apply for business loans in a time span of at least 1-2 months.
- Check CIBIL Report: Check the CIBIL report from time to time and if there is any wrong information entered, get is corrected.
How to get a Business Loan?
The advent of technology has made applying for a loan for business really easy. Now, the business owner can apply for a small business loan online from the comfort of his home or office. Also, the business loan application form can be filled at any time, not necessarily in the morning or the working hours of the lender. The following are the steps which will help you apply for a loan for business:
Step 1: Visit the website of the lender. Many lenders also offer their mobile App – loan application can be filled through it as well. Fill are the required information on the application form and click submit.
Step 2: Upload the soft copies of all the required documents after submitting the loan application. It is recommended to upload the documents in PDF format since they make the processing much easier and faster. The borrower can also upload a couple of documents at one time and others later. Mobile Apps save the data but at the same time, offer secure storage.
Step 3: Wait for approval. The NBFCs keep the borrowers updated with the loan application process. If the loan application is approved, they disburse the loan amount within a few working days. And, if the loan application is rejected, they share the reasons for it and tell you when you can apply for a loan for business next time.
A business loan can help the business in many ways but there is a lot to know about it before applying for it. Since loan for business can boost the business towards a positive direction, it is important on the part of the borrower to make a sound decision only after considering all the facts related to it.