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 define business loans and their types and explore eligibility criteria associated with them.
What is a 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.
What Are the Types of Business Loans?
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.
What Are the Eligibility Criteria for Business Loans?
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.
What Documents Are Required to Apply For a Business Loan?
Various documents are required to apply for a business loan. Keeping these documents ready is crucial to increase the chances of loan approval. The 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.
Wrapping Up
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!
FAQs
The different types of business loans are:
Term Business Loans, Working Capital Loans, Commercial Business Loans, Startup Loans, Equipment Financing
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.
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.
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.
20 February 2025
4 mins read
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