What Is a Business Loan?

Entrepreneurship has quickly become the new trend among young Indian entrepreneurs in today's age of creativity and growth. Young entrepreneurs, in particular, find entrepreneurship enthralling, which leads them to engage in business operations that rapidly expand—thus necessitating loans to fund company growth. For small to mid-sized businesses (SMBs), loans are increasingly common when financing growth plans.

Most banks in India lend to corporate firms, public limited companies, and others, providing funding up to the approved sum for businesses via loans from banks or non-bank financial companies (NBFCs). Although their characteristics may be similar, each loan can differ in terms of interest rate, maturity, and other terms set by lending institutions like banks and NBFCs.

Business Loan Process

When taking out a loan for your new venture from a bank or insurer, they usually provide an upfront lump sum amount that can be paid back monthly in installments at either a fixed or floating interest rate. There is no minimum loan sum requirement; funding of up to Rs 1 crore may be approved depending on business needs. Repayment periods typically range from 12 months to 5 years (unless extended at the lender's discretion).

1. Poor Credit Rating

Credit ratings are used to assess a debtor's creditworthiness. A credit reporting firm such as CRISIL or ICRA evaluates this by looking at personal and home loans, credit card payments, and more. Borrowers with excellent credit histories typically can apply for loans through banks. Those with lower scores should consider an Automated Clearing House (ACH) or Merchant Cash Advance as an option; however, be mindful that ACH and MCA loans come with higher interest rates regardless of your credit standing.

2. Cash Flow Status

Banks conduct rigorous due diligence when considering loan applications from businesses, taking into account any likelihood of turnaround or default in advance. Consequently, loans heavily depend on cash balance statements from the business. Companies should outline how they intend to utilize loan proceeds and generate income to repay the debt.

3. Business Operating Time

A start-up company is defined as any entity that has been operational for less than two years, making it ineligible for conventional bank loans. Usually, banks expect companies to have been operational for at least two years before lending money. Ideally, an enterprise that has existed for at least two years has the highest likelihood of receiving financing options.

4. Nature of Business

Companies can be classified as cyclical, defensive, or growth businesses, depending on the essence of their operations as well as their stage and maturity considerations. Healthcare services, household goods, and personal care industries tend to fall within this classification due to the non-cyclical nature of their industries.

Cyclical businesses, like car manufacturers, rely heavily on economic cycles for success and operate according to these cycles. For instance, these businesses experience growth when people purchase more cars during times of economic expansion. Growth firms tend to be younger businesses that expand quickly early on with an innovative concept before maturing and stabilizing as defensive enterprises. Therefore, loan volumes and feasibility depend on factors such as the type of company being financed, its current state, potential for growth, expansion plans, and any economic conditions that might impact its success.

5. Lack of an Appropriate Plan

In any economic system, having and adhering to a schedule and plan is more appealing than being spontaneous. Moreover, adhering to such an agenda increases the chances of securing business loans, so creating a detailed business plan prior to meeting with lenders is imperative. A typical business plan includes an overview of the organization, its industry, products, and financials. If you're uncertain whether your proposal is convincing enough for lenders, consider hiring a business plan specialist to evaluate it and discuss its viability. Additionally, clearly outline how you intend to spend any borrowed funds.

Steps to Apply for a Business Loan

1. Compare and assess business loans available through banks or online platforms. Visit your preferred platform and study their business loan offerings.
2. Choose an offer that best meets your company's needs by filling in all relevant details.
3. Once submitted, your lender will contact you for further verification and to complete all loan formalities.
4. Upon approval of your loan application, the approved loan balance will be distributed to your specified bank account within three working days.

Eligibility Criteria for Business Loans

The eligibility for business loan depends on various criteria. Depending on which bank issues the loan and its accepted risk level, a business loan may be obtained with or without collateral.

• Limited or Private Limited Companies: Net profits must exceed Rs 150,000 annually when taking out loans of less than Rs 1,500,000, and Rs 300,000 for larger loans.
• Partnership Firms: Each investor should contribute at least 25% of company revenue as their share.
• Age: Applicants must be between the ages of 21 and 65.
• Citizenship: Must be an Indian citizen without a criminal conviction.
• Income: Your business must have been profitable for at least the last two years, generating a minimum annual revenue of Rs 150,000.

Due to regulatory barriers, associated expenses, and the time taken to secure funding sources such as stock and bond markets, small companies often need alternative sources of finance, such as business loans or commercial loans. Such loans can ultimately be utilized for various commercial purposes, but the borrower must clearly state the reasons when entering into a loan agreement.

Conclusion