What is a Business Loan?
Business loan is a funding support offered by Banks and NBFCs to meet the financial requirements of self-employed customers. It can be availed by individuals, MSMEs, business owners, entrepreneurs, and several other entities.
Business loans are mainly classified into two types, such as secured loans and unsecured loans. Secured loans are types of loans that require collateral/security that a borrower needs to deposit with the lender to avail a loan. However, in the case of unsecured loans, there is no need to submit any collateral/security with the bank, NBFC or any other lender.
Most of the financial institutions offer unsecured business loans, including Term Loans, Working Capital Loans, Loans under Govt. schemes, Overdrafts, etc. Leading banks offer secured loans in the form of Letter of Credit, Bill/Invoice Discounting, Equipment Finance, Machinery Loans, POS loans, etc.
The minimum loan amount offered starts from Rs. 30,000 that can be availed from Small Finance Banks (SFBs), Regional Rural Banks (RRBs) or Micro Finance Institutions (MFIs). Borrowers can avail collateral-free business loans for up to Rs. 1 crore from leading banks and NBFCs. Small business loans are also available for MSMEs and Start-ups at affordable interest rates from top banks.
Business Loan Interest Rates from Top Banks/NBFCs:
Business loan interest rate offered by financial institutions starts from 14.99% and is determined as per the eligibility of the applicant and business requirements.
Interest Rate for Business Loan Usually falls in the range of 12% to 28% p.a
Note: The mentioned interest rates are subject to change and depend on the sole discretion of the bank, NBFC, SFB, MFI and RBI.
Business Loan Types:
1. Term Loan
Term loan is offered under various types, such as short-term loan, long-term loan and other small business loans. The loan amount offered under term loan depends on the applicant’s profile and business requirements that can be repaid in 12 months to 5 years, in the form of EMIs. Term loans are divided into two parts, unsecured business loans, and secured business loans. Secured loans require collateral to be submitted with the lender, which is not the case with unsecured business loans.
2. Working Capital Loan
Working capital loans are availed to meet the day-to-day business requirements or to manage business cash flow. The working capital loan can be availed for various other purposes, such as business expansion, buying equipment or machinery, purchasing raw material or goods, paying off salaries or rent, enhancing inventory, and much more.
3. Bill (Invoice) Discounting
Invoice discounting is a financial instrument offered by banks and NBFCs. Bill discounting is a source of working capital finance for the seller of goods on credit. It is a discount which a financial institution takes from a seller’s customer. Through the payment being made by letter of credit, the buyer has the option of buying goods from the seller. Bills that come under bill discounting are termed as ‘bills of exchange’.
4. Letter of Credit
Letter of credit is a payment instrument used mainly in international trade in which the bank provides a monetary guarantee to enterprises that deal in the import and export of goods. Enterprises doing businesses overseas have to deal with unknown suppliers and they require assurance of payment before performing any transaction. Therefore, a letter of credit is important to provide payment assurance to the suppliers or exporters.
5. Point of Sale (POS) Loan
Point of Sale Loan is a type of funding wherein merchants offer their customers some financial assistance at the point of their purchase. Business owners, enterprises, MSMEs, entrepreneurs, and retailers can avail Loans against POS machines to start a new business or to manage their existing businesses. POS Loan is also termed as Merchant Cash Advance in which the loan amount depends on the business volume generated via POS terminals.
6. Overdraft Loan
An overdraft means overdrawing money from ones’ current/savings account even if the account balance is zero. An agreed rate of interest will be charged if the overdrawn amount is within the limits of a preceding agreement. The interest rate is charged only on the utilized amount of the total withdrawal limit.
Business Loan Eligibility Criteria
Business Tenure: Minimum 1 year or above
Minimum Annual Turnover: Rs. 12 lakh or above for existing enterprises
Credit Score: 750 or above
Applicants with No past loan defaults
Individuals, Business Owners, Entrepreneurs, Self-employed professionals, Startups, and Micro, Small, and Medium Enterprises (MSMEs)
Private and Public Limited Companies, Sole Proprietorship, Partnership Firms, Limited Liability Partnerships, and Large Enterprises engaged only in Manufacturing, Trading or Services sectors
NGOs, Co-operative Societies, Trusts and professionals, such as CAs, Doctors, Architects, Company Secretaries, Designers, etc.
Documents Required for Business Loan Application
When applying for a business loan, you will need to submit the following documents:
Duly filled application form along with passport-sized photographs
KYC Documents of the applicant, including PAN card, Passport, Aadhar Card, Driving License, Voter ID card, Utility Bills (Water/Electricity Bills)
Last 1 years’ bank statement
Copy of Non-Collateral Overdraft, if any
Copy of Business Incorporation
Any other document required by the lender
What are the Business Loan Fees and Charges?
The fees and charges of business loan vary from lender to lender and case to case. The fees and charges depend on the loan amount, interest rate and repayment tenure.