Financing the business through loans is a difficult decision that an enterprise has to take. However, this kind of a loan is generally required by small businesses. Deciding the accurate amount of business loan is essential so that it will not hamper the profits and operations of the business. Therefore, it is crucial to know everything about business loans.
Business Loan: Introduction and Features
A business loan is a loan that is particularly provided for business purposes. The basic function of a business loan is to manage the expenses or expansion cost of the business. However, every company has a different purpose for applying for a loan. Many firms take loans for financing growth, expansion, or diversification while some businesses apply for a business loan for financial day-to-day operations like salaries, supplies, or inventory.
Here are the features of business loans:
- The eligibility criteria of a business loan are not very stringent
- A business can apply for high-value loans
- The application process of the business loan is generally hassle-free as compared to personal loans.
- There is flexibility in repayment tenure.
- Usually, there is no complex documentation required for applying for a business loan.
Like in any personal loan, in business loans also there are two categories, i.e., secured and unsecured. Secured loans are the loans that are given after keeping collateral or security with the financial institution. While unsecured loans are the loans that are given without any collateral. Apart from this, there are various types of business loans for which a business can apply.
Types of Business Loans
1Working Capital Loan
Loans which are sanctioned to finance the working capital are called working capital loans. Working capital means the amount which is required for carrying out the day-to-day operations smoothly. Many businesses lack the finance to keep the business operational. Such businesses can apply for a business loan within this category.
2Fixed capital loans
Fixed capital loans are the loans that are given for financing fixed assets, especially machinery and equipment. Purchasing Machinery and equipment in any business requires a big investment. In addition to it, many times, businesses need to change the machinery due to outdated systems or technology. Many businesses try to finance such expenses by cutting down the cost butonly a few achieve this objective. Therefore, in this situation, a machinery and equipment loan is the best alternative.
Professional loans are given by financial institutions to professionals only. There are many professions like Chartered Accountants, Doctors, and Engineers who lack the finance initially to sustain their personal business or consultancy. However, the need for finance can also arise for growing the professional practice. Therefore, for such professionals, this kind of loan is best suitable.
4Loan for women
One of the types of business loans is loans for women. In today’s times, many women are starting their businesses and heading towards the field of entrepreneurship. For such ladies, there is a specific business loan. Under this type of business loan, the features and conditions of providing the loan are made as per the suitability of a woman entrepreneur. Therefore, this type of loan is best for women entrepreneurs.
Documents Requirement for Business Loan
If we talk about India, here are the documents required for a business loan:
- Identity Proof
- Address Proof
- ITR and balance sheets of the last 3 years. It should be audited by an authorized CA.
- Certificate and proof of business existence
- Business proof
- Bank account statement of last 12 months
- Address proof of the business
However, it is a general requirement for a business loan. It entirely depends on the institution from which a business is taking a loan.
Business Loan Eligibility
Now, the question is who is eligible for a business loan. Here are the eligibility criteria for business loans in India:
- Individual should be a citizen of India
- Individuals who are self-employed and aged between 26-66 years.
- Individuals should have 3 years of business vintage
No business can withstand without financing. Every activity in the business requires finance. Be it manufacturing or advertising, finance is needed everywhere. However, not every business may have a sound financial position. A business loan indeed increases the liability, but the advantages are much more than this liability. Therefore, any business requiring finance should apply for a business loanfor smooth functioning and better profitability.