The Creditmantri Guide To Business Loans

We live in the era of startups. Individuals are turning entrepreneurs with wonderful business ideas. However, any business needs funds to grow and build operations. There are various types of funding available for a business, which include private equity, venture capital funding, crowd-funding, self-funding, overdrafts, and loans.

Loans can be an easier way of getting the funding required for expanding a business without diluting any stake in ownership.

What is a Business Loan?

Just like an individual requires loans for buying various assets such as a home or vehicle, a business loan aims to bridge the funding needs of a business establishment. These could be long-term or short-term loans. The funds could be used by the business for various reasons like

• Buying a fixed asset

• Meeting working capital requirements

• Inventory management

• Acquisition of another company etc

Additional Reading: Business Startup Loan

Who can get a business loan?

You could qualify for a business loan if you are a business entity. All forms of businesses are eligible for applying for a business loan, subject to them meeting all the conditions set by the lenders. It could be a sole proprietorship firm, partnership, a private or public limited company. The age limit of the applicant has to be between 21 to 65 years of age.

Maximum limit offered under the Business loan

Any amount from Rs. 1 lakh to Rs. 1 crore and above can be granted as a business loan. The loan amount sanctioned is at the discretion of the lender. Generally, factors like a solid business plan, previous years' profitability, future business plan, utilization of funds and general economic trends are taken into consideration while sanctioning a business loan.

The rate of Interest charged

The rate of interest charged for a business loan is always higher than the loans sanctioned to individuals, as there are more risks involved in a running a business. The interest rates could range anywhere between 11-26% depending upon the lender and the nature of the business. A processing fee of 2-3% of the amount sanctioned is also charged.

The interest charged is also a factor of the credit score of the business, financial standing of the business and the general trending interest rates in the market

Credit Score  

Large businesses who come out with debt offerings gets credit rated by agencies such as CRISIL, ICRA, etc. However, small businesses do not have these ratings, hence credit score of the key personnel of the business organization will be taken into consideration. It is also possible to get a free rating and credit analysis of your business with us here, which will improve your chances of securing better deals on your business loans.  

Collateral requirement  

Business loans are riskier for lenders and are high-value loans, hence there is a requirement of some kind of an asset as collateral. This could be in the form of residential/ commercial properties or liquid assets like bank deposits, etc. The bank takes over the collateral in case you default the business loan. The collateral so offered should be commensurate with the loan being applied for. However, there are certain lenders who lend without collaterals. You might want to check them here.  

Additional Reading: Types of collaterals that you could provide for a business loan 

Documents required for a business loan  

Documentation for a business loan differs between lenders. Generally, these are the common documents that every lender looks for:

• Certificate of Incorporation or the Partnership Deed

• Bank Statements of your business account

• Financial statements of at least last three years, like Profit & Loss Accounts, Audited Balance Sheets, Audit Reports, etc.

• Reports of Statutory Filings like Income Tax Returns, GST returns, VAT returns (for earlier periods of business)

• PAN cards of the business and other key operating personnel

• Projected financials for the future terms

• Any other supporting documents for specific loans like Equipment financing, invoice financing etc.

Additional Reading: 3 Tips for Qualifying for a Business Loan

General Financial and Economic Condition

General economic conditions in the country and the financial health of the business matter a lot to the lenders. All previous years' statements of accounts, the intended purpose of utilization of the funds, expected revenue generation, etc. are some of the things that are carefully analyzed before sanctioning a loan.  

New age/ Fintech Lenders

In spite of better and improved methods of risk assessment of borrowers, traditional lenders like banks do take a significant amount of turnaround time to sanction business loans. According to a recently released TransUnion CIBIL™ -SIDBI MSME Pulse Report, the turnaround time (TAT) for lenders has decreased from 32 days in 2016 to 26 days in 2018. Yet this seems like quite a long delay for business owners and entrepreneurs who are in need of immediate credit.

In addition, traditional lenders are also known to demand collaterals when approving business loans. Providing collateral for business loans may prove difficult for small business owners or those businesses primarily into services.

Business owners can therefore make utilisation of easy loans made available through many of the fintech lenders. These lenders neither insist on collaterals nor on extensive documentation. In addition, the loans are cleared as early as with 3-4 days too in some cases.

These lenders have their proprietary algorithms which helps them make the lending decisions faster, for which minimal documentation is needed. Also, loan approvals are made on a case-to-case basis, thereby fixing no general criteria for making business eligible for their business loans.

However, they might charge a rate of interest which is a little higher than the traditional lenders.  

Business Loan Schemes Run by the Government 

Pradhan Mantri Mudra Yojana (Mudra Loans)  

This loan scheme aims at providing financing for micro enterprises in the country, with the aim of job creation, income generation and to encourage setting up of businesses. Mudra Loans can be used to set up business or as funds for business development.  The borrowers can also get MUDRA debit card which is issued against the loan account.  

The borrowers can get up to Rs. 10 Lakhs under this scheme. There are three variants, namely Shishu, Kishor and Tarun depending upon the stage of the business.   

 

 

For loans up to Rs. 1 Lakh for micro units, it is disbursed through Micro Finance Institutions (MFIs). Women entrepreneurs can get loans under MFIs at a reduced interest rate. Other finances can be obtained through commercial banks, regional rural banks and co-operative banks.

Credit Guarantee Fund Scheme for Micro and Small Enterprises

Launched in the year 2000, this scheme aims at easing the availability of credit to small and micro enterprises. Collateral Free loans are provided under this scheme to both new and existing enterprises, however the risk of paying the loan back to the eligible enterprises is assumed by this Fund Scheme. The eligible borrowers can get up to Rs. 1 crore as the loan amount under this scheme.

MSME Business Loans in 59 Minutes

This is a recent initiative launched by the Government of India to provide MSME business loan approval in 59 minutes. The time involved in processing and disbursal of loans is reduced through this initiative. An amount of up to Rs 1 crore could be availed through this initiative.

Post the approval of the loan, the actual disbursal is also estimated to be done within a time period of 7 to 8 working days. The usual business loan formalities of provision of collateral, etc. will be done as usual.  

The ease of availability of loans has certainly improved over the last few years with multiple avenues being opened up and made it easier for businesses of all sizes.