A business loan is cited as one of the best optionsfor small business owners to get additional funds for their business. It is a kind of financing that which is availed to meet the urgent needs of the growing small businesses and also during a cash crunch. The funds so availed can be used to buy machinery, boost production, or to increase working capital.
The small business owners can avail a business loan online or offline. Although the business loan eligibilitywould differ from one lender to another, the usual criteria include:
- Turnover of the business should be at least INR 10 lakhs in the last 12 months.
- And the ITR of the last year should bemore than 2.5 lakhs.
Broadly business loans are categorised under two— secured and unsecured business loan.
Secured Business Loan
The basic difference between a secured business loan and the unsecured business loan is the requirement. The major secured business loan requirement is a collateral, the borrower is required to hypothecate an asset as security. Secured business loans in India are usually offered by traditional lending institutions such as banks. The secured business loan interest rates depend from one lender to another.
Since the borrower pledges a collateral in terms of an asset to secure a business loan, this type of business loan is ideal for big business units. However, secured business loans are not an ideal option for small business owners since they usually do not have an asset to hypothecate.
Unsecured Business Loan
On the other hand, unsecured business loans are offered without collateral and are also called as collateral-free business loans. As opposed to a secured business loan, an unsecured business loan is offered without security. This loan for business without security is an ideal option for small business owners. Most unsecured business loan lenders in India are NBFCs. The unsecured business loan eligibilityand requirement varies from one lender to another. An unsecured business loan in Indiacan be used to increase working capital, buy new machinery, orstart a new branch.
A business loan also differs according to the needs of the borrower, i.e. there are business loans which are specially designed to suit the special needs of the small business owners. The 4 types of business loans are:
Flexi Business Loan
A flexi business loan is a type of a new-age business loan. Here, the borrower gets a loan limit sanctioned up to which he can use the funds as and when required. A flexi loan in India can be used to fulfildifferent business requirements, such as during the capitalcrunch, expansion, and manpower training. A flexi business loan is ideal for small businesses who often face an unexpected cash crunch. The small business owner can avail funds at the time of need without having to wait for the business loan approval and disbursement time.
The noteworthy point is that the borrower is required to apply for a business loan once and get his limit approved. Once he gets his limit, he can use the finances anytime without applying for the flexi business loan again.Also, the borrower is charged interest only on what he uses.
Purchase of equipment and machinery often requires a hefty investment. And not all business’ financial conditions allow them to buy such expensive machinery or plant. A machinery loan is specially designed for this purpose. Many banks and Non-Banking Financial Companies (NBFCs) offer machinery or equipment loan to those seeking financial aid to invest in machinery. A borrower can choose to avail the business loan from the lending institution who:
- Requires very minimal machinery loan documents.
- A lender whose machinery loan rate of interest isthe best in the market.
Working Capital Loan
The type of business loan availed to finance the everyday operations of the business is called the working capital loan. This type of business loan is not used to buy loan term assets but to cover accounts payable, salaries and wages, etc. Working capital loans are an ideal option for a businessthat has seasonality or cyclical sales cycles. This business loan is usually unsecured and is availed for short-term.A working capital loan can also be availed to increase working capital or purchase more inventory.
The working capital loan in India is offered by both banks and NBFCs. The working capital loan interest rateis usually low and isoffered on comparatively easy terms and conditions. The repayment tenure for a working capital loan may range from 12-24 months.
The term loan is usually availed for a pre-defined time. A term loan can be a short-term or long-term business loan. They can also be a secured or unsecured business loan. Term loans are usually availedfor a variety of purposes, such as buying or upgrading equipment or machinery, increasing working capital or leasing office premises. The maturity of the term loan depends on the borrower’s ability to repay, i.e. he can decide the term of the loan—long or short.
A business is indeed a great help for small business owners. And now that you know the types of business loans that you can avail, let us have a look at how you can avail a business loan:
- Apply: You can apply for a business loan online or offline according to services offered by the lending institution. Most lending institutions in India offer online business loan application process, there is no need for the borrower to visit the lender’s office personally but can apply online.
- Documents: After applying for a business loan, the borrower must submit the business loan documents. Again, according to the lender’s services, the borrower can either submit the hard copies to the lender personally or upload soft copies on the lender’s website. It is important for the borrower to meet the business loan eligibilityin order to get the business loan approved.
- Disbursement: If the lender approves the business loan, the borrower will get the sanctioned finances within a few working days. The business loan disbursement time will depend from one lender to another.