The A to Z of Business Loans4 Oct 2016
For an entrepreneur or a budding businessman, business loans become an important part of business expansion. Which is why it is important to be clued in to the ways and means of obtaining one, the pitfalls one should avoid, and the legalities one should be aware of.
What is a business loan?
Essentially, a business loan is a legitimate way to add to the capital of your business. The borrower takes this loan with the express intention of setting up a business or expanding an already existing one. It is similar to any other loan in the sense that the borrower is bound to pay back the amount along with interest in the time stipulated at the time of obtaining the loan. How is this different from a personal loan? Indeed, a personal loan can bail you out of a financial crisis but banks do not easily offer them; and since the money is required for a business, taking a business loan makes much more financial sense.
Who is eligible for a business loan?
Banks offer business loans to a wide variety of customers – they include companies, self-employed individuals, entrepreneurs, manufacturers in industries such as mechanics, automobiles, chemicals and jewellery, and also service providers like hotels, hospitals, retailers, wholesalers as well as stockists and distributors.
Whom to approach for a business loan?
The borrower interested in a loan must approach any financial institution and enquire about the eligibility criteria and the type of loans that are on offer. The bank or any other financial institution approached might require certain verification documents before they consider offering the borrower a loan. Some institutions also require the borrower to provide a collateral. The eligibility criteria may differ slightly from institution to institution but generally it includes:
2. Business experience of the promoters/directors
3. Annual income and profits
4. Vintage (History / Existence in years) of the business
If the loan is being requested for a new business, the criteria are different.
Once the eligibility is satisfied, the financial institution will require the borrower to submit certain documents. These too vary depending on the loan offered and the institution but in general include:
2.Bank account statements
3.Balance sheets, if any
4.Tax (IT / ST / VAT etc.) returns
5.Business deeds (such as Partnership deed, sole proprietor declaration etc.)
6.Proof of business expansion/continuation
Again, if the loan is being applied for a new business, the verification might be more detailed and long-drawn.
Types of Business Loan
Loans are, in general, short term or long term, professional or trade and secured or unsecured. Specifically, institutions usually offer the following types of loans for business.
1. Start-up loans: Some institutions and banks have now set up special programmes to finance entrepreneurs. In such cases, the banks or the FIs make a detailed assessment of the borrower’s business plan, his background, assets and liabilities, credit history etc. Once the lender is satisfied, they may grant the loan. Such a loan will usually require a collateral.
2. Overdraft: When the borrower already holds a current account in a bank, he can request to withdraw money from this account on pre-set terms and conditions. Thus, overdraft is a temporary loan which allows you to access extra funds through your transaction account up to an approved overdraft limit. The customer is charged for the number of days of usage of capital from overdraft limits.
3. Term loans: Usually availed for business expansion or to set up a new unit, term loans as the name itself says, are taken for medium or long terms. These terms can vary from 3 to 15 years. Many term loans require collateral and usually, offer lower interest rates.
4. Working capital: Every business has pressing financial requirements on a day-to-day basis. Getting quick and timely access to financial needs becomes crucial for the smooth working of any business. It is for this purpose that FIs offer working capital loans. The specifications for these loans vary according to the business and the borrower’s history and FIs offer several modes of working capital loans.
For any borrower, it is important to first make a thorough assessment of the business plan and the reasons for the loan before approaching the financial institution. Once the reasons are in place, it will be easy to zoom in on the type of loan most suited for the business. This is vital to be able to utilize loans taken for business needs well and avoid getting mired in unnecessary debt.