Types of Business Loans in India – 2023

Business loans, also known as commercial loans, are funds financial institutions provide to support businesses of all sizes, from startups to established companies. These loans can be used for various purposes, such as working capital, equipment purchases, expansion projects, etc. This article gives an overview of business loans, including types, eligibility criteria, documents required, how to apply, and the benefits and drawbacks associated with them.

Types of Business Loans

Business loans come in a variety of forms, including:

1.  Unsecured Business Loan

This is the most popular type of business loan and requires no collateral. It’s ideal for businesses with a strong credit history and reliable cash flow. These loans are usually short-term and have higher interest rates than secured loans.

2. Secured Business Loan

This loan is supported by collateral such as real estate or other assets. It’s best for businesses that don’t qualify for an unsecured loan due to their credit score or financial history. While the interest rate on such a loan is usually lower, it’s important to remember that lenders can seize the collateral if it isn’t paid back as scheduled.

3. Business Line of Credit

A business line of credit is similar to the process of credit card in that you borrow up to a certain amount and only pay interest on what you use. It’s ideal for businesses that need access to many funds but doesn’t want to take out an expensive loan.

4. SBA Loans

These are government-backed loans offered through the Small Business Administration (SBA). They come in two forms: 7(a) loans and 504/CDC loans. These startup business loans offer low rates and long-term repayment plans that make them attractive for businesses.

5. MUDRA Loan

The Pradhan Mantri Mudra Scheme (PMMS) is a government-backed loan for noncorporate, non-farm small/micro enterprises. PMMY-backed MUDRA covers three products, namely: Shishu, Kishore, and Tarun, to justify the stage of growth and funding. This is one of the best government business loans offering up to Rs 10 lakhs with minimum interest rates.

Eligibility Criteria For Business Loans

The eligibility requirements for business loans vary depending on the type of loan. Generally, lenders will look at factors such as personal credit history, business plan, cash flow, and other financial documents to determine a borrower’s eligibility for a loan. Here are some of the common criteria for most types of business loans:

Minimum revenue and/or business age requirements

Most lenders require businesses to have been in operation for at least a year and have an annual revenue of at least 1.5 Lakh.

Personal credit score

Personal credit scores are usually considered as they indicate how well you manage your finances. A good credit score typically ranges from 700-750 for most lenders.

Business plan

A detailed and well-thought-out business plan is necessary to demonstrate that the borrower has a clear vision of how the loan will be used and when it will be paid back.

Tax returns

For taking up a business loan for large businesses, lenders may require up to three years’ worth of business and personal tax returns to verify the borrower’s income.

Financial statements

Financial statements such as balance sheets and profit/loss statements provide evidence of a business’s current financial standing.

Collateral

Depending on the loan, lenders may require collateral such as land, gold or other assets to secure the loan.

Documents Required For Business Loans

The business loan eligibility documents vary depending on the type of loan being applied for. Generally, lenders require the following documents:

• A copy of your photo ID
• Proof of address (utility bills or bank statements)
• Business license and registration documents
• Proof of business revenue (bank statements)
• Personal and business financial statements
• Tax returns for the past three years
• Business plan (for larger loans)
• Collateral documents (if applicable)

Depending on the lender, additional documents may be required.

How to Apply For Business Loans In India?

Applying for a business loan in India is relatively easy. All you need to do is choose the type of loan that best suits your needs and then fill out an application form with relevant details and documents. You can apply online through the business loan apps or visit a bank or financial institution to apply in person. The lender will then assess your application and provide you with a loan based on your creditworthiness and eligibility.

Once approved, the lender will deposit the money into your bank account, and you can begin using it for your business needs. Repayment terms vary depending on the loan type but typically range from 3 to 10 years. Make sure you are getting the best deal on business loan interest rates, comparing different lenders and their offers is important. You can do this online or by visiting the lender’s office in person.

Finally, make sure that you read your loan terms and conditions carefully before signing any documents. This will help you understand your repayment obligations and avoid any surprises down the line.

Benefits of Business Loans

Business loans offer numerous advantages to entrepreneurs and small business owners. These include:

Easy access to capital

Business loans provide quick access to funding, allowing businesses to take advantage of opportunities or fund projects without waiting a long time.

Flexible repayment terms

Most lenders offer flexible repayment terms tailored to the borrower’s needs, making it easier for businesses to pay back their loans on time.

Tax benefits

Businesses can avail of tax benefits while repaying business loans, as the interest paid is generally tax deductible.

No collateral

Many lenders offer unsecured business loans without collateral, making them a great option for startups and small businesses without access to major assets.

Opportunity to build credit

Repaying your business loan on time can help you establish a good credit history, as most lenders will report your payments to the credit bureau. This can open up opportunities in the future.

Cons Of Business Loans

Despite the advantages, business loans also have certain drawbacks. These include:

High-interest rates

Business loans often come with higher interest rates than other types of financing, making them more expensive in the long run.

Strict eligibility criteria

Most lenders have strict eligibility criteria, and it can be difficult for some businesses to qualify for a loan.

Time-consuming

The process of applying and getting approved for a business loan for a new business can be quite long, especially if you are dealing with traditional lenders.

Processing fees

Many lenders charge processing fees or other charges that add to the overall cost of the loan.

Early repayment penalty 

Some lenders may charge a penalty if you decide to pay off your loan before the agreed-upon term.

Make sure you consider all the pros and cons of business loans before applying. This will help you make an informed decision and find the best option for your needs.

Conclusion

Business loans are a great way to access the capital amount you need to kickstart your business or expand it. With careful research and consideration, business loans can be an excellent option for businesses looking for funds to grow their operations. Just make sure to compare different lenders and their offers, read the terms and conditions of your loan carefully, and be mindful of any potential costs or penalties. Doing this will ensure you get the best deal possible and enjoy the benefits of a business loan.