What Is Business Loan? - Meaning, Benefits, & How to Apply?

What is a Business Loan?

Types of Loans to Finance Your Business

• Bill Discounting, Invoice Discounting, Purchase Invoice Finance- It is a loan based on the amount due from debtors i.e. pending invoices so that the loan amount can be used in various activities till the customers pay.

• Working Capital Loan- This refers to a loan that funds your day-to-day operations to run the company.

• Secured Term Loan- A loan that involves a collateral offered in return for the loan, usually an asset such as property, which serves as a guarantee to the lender.

• Business Loan- Businesses seek this loan to get financial assistance for any endeavours.

• Project Finance- This is financing for a particular project, usually a long-term infrastructure project where the lender is repaid using the cash flows of the same project.

• Acquisition Finance- Acquisition refers to buying another business and this type of loan funds that purchase.

• Machinery Loan- This type of loan caters to businesses looking to purchase machinery to increase their production capacity.

Eligibility Criteria for Business Loans

• Lenders may require a minimum credit score depending on the type of loan. 
• To know the meaning behind your business loan lenders check your business plan.
• With your revenue, profit, and cash flow projections they assess the borrower's repayment capacity. 
• Finally, lenders may also consider the borrower's industry experience and the age of the business to evaluate the overall risk profile.

Documents Required for Business Loan

• Financial statements of the business, such as balance sheets, profit and loss statements, and cash flow projections. 
• The borrower's personal financial documents, such as tax returns, bank statements, and credit reports, may also be required. 
• Additionally, the lender may ask for collateral, such as real estate or equipment, to secure the loan.

What are the Different Components of a Business Loan?

1. Principal Amount- The principal is the amount borrowed, which then determines the rest of the loan components. For example, A borrows Rs 50 lakhs for expanding his business to another city. A’s principal is Rs 50 lakhs and the interest starts getting charged on the same.

2. Rate of Interest- The interest rate is basically the cost of borrowing, paid apart from the principal and is usually expressed as a percentage of the principal. 

• Fixed- The type of rate that remains stable throughout the tenure of the loan.
• Floating- The opposite of fixed rate, the floating rate does not stay constant fluctuates throughout the tenure of the loan.
• Progressive- In this scenario, the rates are differently charged with each loan disbursement. For example, if the lender releases Rs. 2 lakhs this year and Rs. 4 lakhs next year, he would charge different interest rates on both amounts, the first one being the lowest.

3. Tenure- The total period from the date of the first disbursement till the date you pay back the last instalment.

4. Foreclosure-  A legal process adopted by the lender in the event of non-repayment by the borrower that involves selling the collateral off to recover the money.

5. Fee

• Pre/Part-Payment Charges- When the borrower pays back the loan before the end of the tenure, these charges are imposed as it is a loss to the lender.
• Processing Fee- This is charged to the borrower when he applies for the loan to cover the initial costs incurred in reviewing and processing the application. The typical costs include credit checks and collateral appraisals.
• Cheque / ECS Dishonor Charges- Such charges need to be paid if the borrower's repayment bounces back.
• Delayed Payment Charges-  Just as it is implied by the name, it refers to charges to be paid by the borrower in case of delayed instalments.
• Foreclosure Charges- This is charged on the outstanding principal amount which the borrower is unable or unwilling to pay back.

How Do Business Loans Work?

Business loan terms have it, you can use the provided funds for various purposes, such as expansion, working capital, equipment purchase, and others. As these loans can be obtained from financial institutions, the borrower can apply for the same by meeting the requirements. And this includes - business plan and a creditworthy profile. If you qualify for the repayment capacity of the lender, they approve the loan. Later you can repay the loan over a specific period, along with the interest and any fees associated with it.

What Are Business Loans Used For?

The definition of Business loans answers your question - a loan that is specifically taken for business purposes. This is why the lender checks your business plan to see where you’ll be investing the loan money. You can use it for various purposes, such as funding start-ups, expanding an existing business, purchasing inventory, equipment, or real estate, managing cash flow, or consolidating debt.

Advantages of a Business Loan

Business loans offer several advantages, such as easy access to funds, flexible repayment terms, lower interest rates, and tax benefits. With the information on business loans, companies can obtain the necessary funds and  grow/expand without relying on their coming profits. With a suitable tenure businesses can lower EMIs while managing their expenditures. 

How To Apply For Business Loans

What is a business loan in India and which types are available to the borrower? All these are answered. Now, you must reach to the next step and identify suitable lenders that offer business loans. The borrower must start with the following steps -

• Provide the necessary documents
• The verification process starts and lenders approve the loan if everything meets.
• Once approved, the borrower receives the funds, which can be used for the intended purpose
• Now they must repay the loan over a specific period, along with interest and any fees associated with the loan.

What is an Amortization Schedule?

The borrower usually has to make instalments consisting of the principal and the interest to pay the lender back. An amortization schedule displays how the entire loan will be repaid. It is a table of periodic loan instalments till the end of the loan tenure.

Conclusion

So, these were the key components that everyone seeking a business loan needs to know about. It's important for you to do thorough research on the different loans available in the market along with an assessment of the company's current and future financial position before plunging in for the loan. We hope the above details are enough to understand which loan you should take for your business. If you still have more questions about loans, please leave your question in the comment section below and we will get right back to you.

FAQs

The amount of business loan you can get depends on - revenue, and collateral. 

To improve your chances of getting a business loan, show a good credit score, prepare a solid business plan, and have collateral to offer. 

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