Small businesses need funds for business growth which are provided to them by business loans. Different types of business loans are offered by lenders. Here is everything that one needs to know about business loans in India.
If you are into business, then you will certainly relate to the need for constant funds to run different operations of the business. In case you have plenty of funds, then there is certainly no need to take a business loan.
However, if a lack of funds is causing a hindrance in the growth of your business, then business loans are what you need. Every business-from start-up to established ones go through a cash crunch at some point in time. But to sustain, one must work hard enough and find ways out so that business grows exponentially.
Businesses will have working capital gaps and the need for periodic capital infusion. To manage these demands, business loans come in handy. They are one of the best alternatives to finance the growing financial needs of the business.
How to Apply for a Business Loan?
A business loan can be applied for either by visiting a bank or other financial institution in person or by applying online for instant approval and funding.
Who Can Apply for a Business Loan?
- Any self-employed individual or professional, sole proprietorship, limited or private limited company, and partnership firm.
- The borrowing business should be working in a profitable state for at least the last 6 months or 1 year at the time of applying for a Business Loan.
- The age of the borrower should be between 25-65 years.
Types of Business Loans in India
Here are the top 5 types of business loans that can help you expand a business.
1. Demand Loan
Demand loans are loans that can be recalled by the financial institution or bank at any time. In these, the borrower will have to repay the amount on the demand of the bank even if it is within a short period of 1-7 days. It is dependent upon the bank’s policy on what the loan was given.
These loans can be secured or unsecured and come at decent prices. They are usually borrowed to overcome the short-term working capital gaps. The maximum term of demand loans is 12 months after which they can be renewed.
2. Term Loan
Term loans are given for a defined term period with the rate of interest being fixed or floating. The maximum tenure for an unsecured term loan is 3 years and for a secured loan with collateral is 15 years. The term loans come with a fixed repayment schedule which can be either monthly or quarterly. The quantum of the loan varies according to the needs and eligibility of the borrower.
Term loans are beneficial if the business owner wants to acquire long-term assets like buildings, land, and machinery. Using these term loans, one can finance building, land, infrastructure creation, purchase of a building, renovation, purchase of machinery, equipment, capital infusion, vehicles, etc.
3. The Line of Credit and Overdraft Facility
The line of Credit or overdraft facility is best suited for frequent cash inflow. Businesses typically need money to avail of cash discounts by paying upfront or on time, extend credit to customers, pay off vendors, or meet seasonal demands. Unsecured Lines of Credit Loans are the best solutions for these needs. Digital lenders like Indifi are granting Lines of credit that can be availed multiple times even if once used. These are like a credit card for business use.
Cash credit loans are granted as overdrafts on the security of the borrower’s stock in trade/raw materials/process. A cash credit facility can be secured by pledging the assets of a business. Lenders ensure that the outstanding balance is less than the drawing power of the borrower. Bank overdraft facility allows borrowers to debit their current account below zero up to a specified limit. It is predetermined by the bank based on collaterals. The interest is charged on the amount which is utilized. In this, the bank has the full right to ask for repayment of money at short notice.
4. Invoice Discounting
Invoice discounting is an excellent alternative to traditional business loans which gives you instant access to cash locked up in your outstanding invoices. You don’t have to wait to get paid by your clients – you can instead get money immediately against your invoices. Digital lenders like Indifi’s invoice discounting facility offer up to 90 percent of invoice value paid upfront. The repayment is very flexible wherein you can pay when the buyer pays you. This is much more flexible than term loans or overdrafts and is a great way to improve cash flows, manage late payments, or keep up with seasonal demand.
5. Merchant Cash Advance
Merchant Cash Advance is a leading type of unsecured business loan offered by top digital lenders like Indifi. Under Merchant Cash Advance, a business can get access to business loans based on their transactions against the card swipe machine and payment wallets. Even the repayments are connected to transactions, which effectively means the business need not worry about the regular installments, as the repayment is completely aligned with the business.
Documents Required to Apply for a Business Loan:
- Identity Proof: Passport, Driving License, PAN card, and Voter ID
- Bank Statement
- Latest Income Tax Certificate
- Audited Financials for the past three years
- Address Proof: Trade License, Electricity Bill, Ration Card and so on
