What is Business Loan? Here is a Basic Guide on Business Loan

A business loan is availed by the entrepreneurs to meet the urgent needs of a growing business. You can take a business loan either to start a new business or to expand an already existing business. The business loan is essentially a capital for business. Like any other loan, you need to prove your creditworthiness to the financial institutions in order to get your loan approved by them. Then you can decide on the tenure and rate of interest for the loan.

Eligibility Criteria for a Business Loan

There are some criteria which should be fulfilled in order to avail a business loan easily. You must be between 25-55 years old and your business should have a vintage of at least 3 years. Get your previous year’ turnover duly audited by a chartered accountant and the income tax return should be properly filed for at least 1 year. These are the basic criteria for availing a business loan.  In addition to this, you must have a decent CIBIL score to prove your creditworthiness.


Types of Business Loan

The business loan can be broadly categorised into 4 different types.

  • Term Loans

They are short term or long term business loan usually availed to finance the start-up of a new unit or expansion of your business. The tenure of this loan varies from 3years to 15 years.

  • Working Capital Loans

The working capital loans are availed to meet the day to day capital requirements of your business. They are very important to keep the business running.

  • Overdrafts

This is a type of temporary loan in which the business owner can overdraw capital from his current account according to the previously decided terms and conditions.

  • Start-up Loans

Many banks have a special provision to fund a start-up company. Here you need to present your business plan to the bank along with your assets as collateral. If the bank is satisfied with the feasibility of your business they can approve a start-up loan.

Things to Remember Before you Apply for a Business Loan

Here are a few things which you should keep in mind before you apply for the business loan.

  • Collateral

The bank requires you to pledge some hard assets as a back-up to your business loan. They would reduce the risk in case you fail to repay the loan. You can pledge personal assets, Accounts Receivables or a percentage of your inventory as collaterals against the business loan.

  • Business Plan

You need to draw a detailed business plan in order to get the loan approved by the bank. The business plan should include the organisational structure, board of directors of the company, revenue model and capital and equity of the business. The bank would also go through your annual sales, employee statistics before approving the loan. You can also chalk out a utilisation schedule to inform the bank how you would utilise the fund once your loan is approved.

  • Credit Score

Your personal credit score as that of your company’s play an important role in the approval of the business loan. Most of the financial institutions require a credit score of 800 and above to approve a business loan. If your company’s credit history has some defaults in the form of irregular payment of EMIs, non-repayment of previous loans then the chances of approval of a fresh loan becomes very slim.

  • Company’s Books

The company books are another important aspect which should be in order to get a quick business loan. You should conduct regular financial audits and submit the details while applying for a business loan. The bank also checks the cash inflow and outflow of your business house, the annual turn-over and your company’s projection before approving the loan. The TIN No., PAN No., GST No and other records related to tax filing should be properly maintained. The bank would also verify the previous loans issued to your company, the credit history is maintained by the bank to ascertain your creditworthiness.

So, these were the important aspects which you should keep in mind before you apply for a business loan.

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