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Tata Capital > Blog > Loan for Business > Business Loan: Definition, Meaning, Types & How to Apply

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Business Loan: Definition, Meaning, Types & How to Apply

Business Loan: Definition, Meaning, Types & How to Apply

For long-term success, sustainability, and expansion, businesses require capital. However, there may be cases where external funding is needed. In such situations, many business owners choose to seek business loans. 

Business owners or entrepreneurs take a business loan to finance their business activities. They can be the lifeline of any business venture. Taking your business to scalable heights can be challenging without a business loan. In this article, we will answer what is business loan, define business loans and their types and explore eligibility criteria associated with them.

What is Business Loan?

A business loan’s definition refers to the money borrowed from a financial institution, specifically for business purposes. The loan provides funds you need to purchase equipment, expand the business, manage the inventory, hire staff, or meet other operational costs. They offer higher amounts than personal loans since they are expected to be repaid from the business’s revenue. 

Borrowers can choose between a secured business loan, meaning it is pledged to collateral, or an unsecured business loan based on their creditworthiness. Your creditworthiness, in turn, depends on your credit score or the business turnover.

Types of Business Loans in India 

Business loans can be divided into various types, such as:

1. Term business loans

These are a popular business financing option and are also known as installment loans. In term loans, the principal loan amount is predefined, the loan tenure is set, and the repayment conditions are also fixed in advance. Term loans offer stability and predictability to businesses, which helps them plan their finances better. These are short-term loans, usually ranging from 1 to 5 years.

2. Working capital loans

Working capital loans help businesses manage day-to-day or urgent operational costs, such as rent, employee wages, and inventory needs. These loans are also short-term loans, ranging from 1 to 5 years. They provide the temporary cash flow during financial crunches associated with a dynamic market, ensuring continuity and stability.

3. Commercial business loans

Businesses typically avail of these loans with at least one year of experience in the business industry and have made consistent profits. This loan finances capital expenditures and major acquisitions like purchasing a new building or business expansion.

4. Startup loans

Explicitly devised to cater to the startup ecosystem, these loans provide significant financial support to budding entrepreneurs without the conditions of collateral or established credit history. With the help of startup loans, new businesses can finance initial expenses such as product management, marketing, and rent.

5. Equipment financing

Equipment financing is needed by businesses involved in manufacturing or construction where heavy machinery is necessary. This loan enables businesses to purchase or lease the latest technology and machinery without making large upfront payments.

Business Loan Eligibility Criteria 

You will be eligible for a business loan if you fulfill the given conditions:

1. Your credit score should be at least 675 or more to demonstrate your creditworthiness.

2. Your business should have at least two years of stability and be profitable.

3. You should have a business plan that specifically mentions the future projections and the purpose of the loan.

4. You should have a bank balance of at least INR 5000.

5. Your age should be at least 21 years when applying for the loan and not over 65 when you pay your last EMI.

6. You should provide accurate legal documents such as tax returns, financial statements, and incorporation certificates.  

Also,read: Know your Business Loan Eligibility  

Documents Required for Business Loan Application 

Various documents are required to apply for a business loan. Keeping these documents ready is crucial to increase the chances of loan approval. The business loan documents include

1. Business proof: This is required to prove your business ownership. It consists of a Business Registration Certificate, GST Registration Certificate, Trade License, or a copy of the Sole Proprietorship Declaration or Partnership Deed Agreement.

2. Bank statement: This includes your current account statements and GST statements for the last six months.

3. Personal ID: This includes your address proof and photo identity proof including PAN card, Aadhaar card, driver’s license, Voter ID card, or Passport.

4. Income proof: This can include Income Tax Returns (ITRs), Audited Financial with Tax Audit Report, profit-loss statements, or balance sheets audited by a chartered accountant.

Business Loan Meaning: How It Differs from Personal Loan or MSME Loan

A business loan is meant for the businesses that want to grow, expand, or upgrade their operations, such as opening new branches or buying machinery. These loans usually have strict eligibility rules and are not easily available to start-ups. 

How does business loan definition compare with MSME and personal loans?

MSME loans are designed for small and micro businesses. Some lending institutions will also offer them to start-ups. They are mainly used for day-to-day needs like buying raw materials, equipment, or managing working capital. 

Compared to business loans, personal loans generally have higher interest rates, lower loan amounts. Personal loans are unsecured and are best suited for smaller expenses or short-term business ideas.

How to Apply for a Business Loan Online: Stepwise Process & Tips

Applying for a business loan online is simple if you prepare in advance. 

Before applying, understand the different business loan meaning, types of business loans available and choose one that suits your needs. You should prepare all the essential documents like KYC, income proof, and business records, ahead of time. You can also use an online calculator to define business loan EMIs as well.

To apply for business loan online, follow these steps:

  1. Visit your preferred lender’s website
  2. Fill out the online application form with requested details.
  3. Next, upload the required documents for verification.

The lender will review your application and documents, and if approved, the loan amount is to be disbursed to your bank account.

Common Mistakes to Avoid When Applying for a Business Loan

When applying for a business loan, avoiding these common mistakes can improve your chances of approval:

  1. Not checking what is business loan’s eligibility rules are can be a mistake. Many applications get rejected because borrowers do not meet criteria like credit score, or revenue.
  2. Submitting incomplete or incorrect documents is another common mistake, which can delay approval.
  3. Applying for loans too often can hurt your credit profile.
  4. A poor credit score reduces approval chances. Improving it before applying will be helpful.
  5. Finally, applying for a loan you cannot repay may lead to rejection, so always define business loan repayment capacity.

Conclusion

A business loan can be the main catalyst behind the growth of your business. Understanding the dynamics associated with it is crucial to take informed decisions and maximise your chances of your loan request being approved.

If you are looking for a business loan to fuel your new business idea, turn to Tata Capital. We offer competitive business loan interest rates, collateral-free loans, and finance of up to Rs. 90 lakhs. To learn more, head to the Tata Capital website or download the app today!

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FAQs

What are the types of business loans?

The different types of business loans are: Term Business Loans, Working Capital Loans, Commercial Business Loans, Startup Loans, Equipment Financing

Do I need collateral for a business loan from Tata Capital?

No, Tata Capital is known for its 100% collateral-free business loans. It means you do not need to pledge an asset as collateral to apply for a business loan.

What is the minimum credit score needed for a business loan from Tata Capital?

To avail of a Tata Capital business loan, you must have a minimum credit score of 675. This will also help you secure better loan terms with favourable interest rates.

What is the difference between a business loan and a personal loan?

A business loan for business-related expenses like purchasing equipment, expanding business operations, or funding salaries. A personal loan is taken to finance personal needs such as medical emergencies, weddings, vacations, and more.

What is a business loan? Define business loan and explain its meaning.

The answer to “what is business loan” is that they provide capital for funding businesses. They’re provided by lenders like banks, repaid over the loan tenure, with accrued interest.

Who is eligible for a business loan in India?

To meet and define business loan eligibility, businesses to have consistent profitability, healthy bank balances, and a strong credit score of the applicant with age between 21 and 65 years.

What are the different types of business loans available?

Tata Capital offers business loans for women, as well as MSME loans, working capital loans, and machinery loans for a variety of business types and requirements.

Which documents are needed to apply for a business loan?

Business loan definition states documents like KYC documents, proof of business, last two years of Income Tax Returns, financial statements, bank account statements, as well as GST statements.

What interest rates and tenures are typical for business loans?

Interest rates and tenures vary for business loans. Tata Capital offers loans with interest rates starting at 12% per annum, with a tenure up to 60 months.

How is a business loan different from MSME loan or personal loan?

The purpose of a business loan is to fund business activities. MSME loans can be considered a subtype of business loans, while personal loans are provided for individual needs.

What is collateral in a business loan? Can I get a loan without collateral?

A collateral in business loan meaning is pledged in order to secure the loan. Unsecured business loans are provided by certain financial institutions, usually at higher interest rates.

What are common mistakes to avoid during the business loan application process?

Some common mistakes include not knowing business loan definition, submitting incomplete paperwork, not having a business plan, and having a poor credit score before applying.

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