Businesses require a substantial sum of money to cover their startup and expansion costs. Because of this, they often look for a business loan to get the capital they require.
However, before dealing with a lender, business owners must have a thorough understanding of their loan requirements, how loans work, and the loan conditions. That being said, this blog discusses the very basics of business loans and a little in-between. Let’s take a look!
The Ins and Outs of Business Loans
Business loans can be categorised as those loans that are available to entrepreneurs who are running their businesses, but need external funding to keep them going. Simply put, a business loan refers to a certain amount of money that the firm has to return in compliance with the loan’s terms and conditions.
However, before granting the loan, lenders assess the credibility of the business and its owner. This involves studying the credit score and company turnover. Furthermore, business owners are legally bound to use the loan money exclusively for the firm expenses and not for personal needs.
The concept of business loans also revolves around ‘repayment’. This is because lenders charge a certain interest on the principal amount that companies need to repay in full, right within the loan term. Under such circumstances, you can use a business loan EMI calculator to calculate your monthly instalment depending on the loan amount, along with your interest rate and tenure. This will help you manage your business loan repayments efficiently.
Furthermore, as a business owner, you can improve your financial management by using a GST calculator to get a better grasp on the impact of GST on your business transactions.
How Many Types of Business Loans are Available in India?
There are several types of business loans in India that are specifically designed to meet different requirements. However, some of the popular ones include:
- Term Loans
Being one of the most popular forms of business loan, term loans offer an upfront payment to the borrower that must be repaid with interest, over a predetermined time frame. These loans are perfect for long-term investments; like expanding a firm, buying assets, or launching a new business.
- Working Capital Loans
Working capital loans are intended to cover a company’s daily operating costs. With efficient working capital management, businesses can better cover their short-term obligations, inventory purchases, cash flow management, and recurring expenses.
- Machinery Loans
A sum that is specifically intended for the acquisition of machinery or other equipment that is further necessary to run a business operation, is known as a machinery loan. These loans help companies improve productivity, boost efficiency, and stay competitive.
- Trade Finance
This type of business loan intends to help importers and exporters in handling global trade transactions. Trade finance loans offer working capital for activities like buying goods, keeping track of inventories, and managing trade costs.
- Startup Loans
These loans are designed specifically for start-ups and business owners who want to establish their brands. With these loans, you can get sufficient capital to start your business and pay for things like working capital, initial investments, and other start-up costs.
- Government-Sponsored Loans
To encourage entrepreneurship and help small and medium-sized businesses (SMEs), the Indian government has launched several loan schemes. Companies that hold an MSME certificate can also benefit from these programs. They come with low interest rates, simple application processes, and easy collateral requirements. Some well-known schemes include the Stand-Up India scheme, the Mudra loan scheme, etc.
Read also: Tips for Finding the Best £1,500 Loan Rates
How to Qualify for a Business Loan?
Some of the basic criteria to qualify for a business loan include:
- Credit Score: A business credit score of 650+ shows your creditworthiness, which most lenders generally prefer.
- Business Plan: A solid plan outlines your vision and financial projections, helping lenders assess the business potential.
- Business Age: Lenders typically require a business to be at least 1-2 years old. This is to ensure its stability.
- Loan Purpose: Always state the loan purpose clearly; be it expansion or equipment purchase. It helps the lender make decisions.
- Collateral: Offering any valuable equipment or property as collateral can increase the chances of loan approval.
- Outstanding Debt: The lender reviews your existing debts. In case you have plenty that you owe, it may affect your loan eligibility.
- Annual Revenue: Above all, a steady income is crucial to ensure you repay the business loan. Lenders may set a minimum revenue threshold.
- Legal Compliance: Lenders will verify your business permits, licences, and registrations. This is to ensure your business is complying with all legal and regulatory requirements.
Takeaway: Choosing the Perfect Lender for a Business Loan
Summing up, securing the right business loan goes beyond understanding the types and eligibility criteria. Above all, it is extremely crucial to choose your lender wisely. Make sure you run a thorough background check and study their customer feedback. Compare their interest rates, assess the flexibility of the loan terms, and find a repayment plan that suits your business needs. Additionally, read their terms and conditions to avoid any last-minute hassles.
