What is a Business Loan/Commercial Loan & How to Apply
A business loan is a loan taken by the borrower with the intention of using it for setting up a new business or expanding an existing way; it is essentially capital for business. Like any other loan, when loan for business is taken the borrower agrees to pay back the borrowed amount along with interest at agreed rate within the stipulated time.
Types of Business Loan:
In order to understand what business finance is we need to know a little about different types of business loans:
- Term Loans: Terms loans can be short term or long term and intermediate loans. The term can vary from 3 years for a short term loan to 10-15 years for a long term. These loans are usually taken to finance expansion or set up a new unit.
- Working Capital Loans: These loans are required by the business to meet its day to day financial requirements. Getting timely access to working capital is important for any business. Different modes may be used to finance working capital needs.
- Overdrafts: An overdraft is a temporary loan; the account holder overdraws from his current account as per agreed terms and conditions. Higher rates are applicable when the overdraft exceeds the limit.
- Start-up Loans: Some financial institutions (FIs) may have special provision for lending to start ups. The lender has to like the business plan and idea and may ask for some assets as collateral. In such a situation the FI will assess the credit history of the promoter of the business, his back ground, assets and liabilities, educational background, the business plan and its feasibility. There are special schemes and programmes to fund ventures by those new to the business.
Depending on the business loan requirements the applicant can decide which type of loan to take; the FI will also assess the requirement and then decide the amount of loan and its terms. Loans can also be short or long term, secured or unsecured and professional or trade loans.
How to Get Business Loan in India:
The person requiring a loan needs to approach a financial institution and check what kind of loans they offer and on what conditions. Based on that; if the loan type matches his/her requirement and if he fulfills the eligibility criteria he/she needs to apply for a loan. The documents required for a business loan are slightly different when compared to what is required for other loans. The documents may vary from one FI to another slightly but below is generally accepted list:
- Application Form
- Bank Account Statements for last 3 or 6 months
- Income Tax Returns
- Balance Sheet and P/L Account Statement for the last 2 years with Annexure
- Form 16 A
- KYC documents for Applicant and Co-applicant (if any)
- Business Vintage for 5 years
- Proof of Business Continuation
- Documents like Sole Proprietor Declaration Or Certified Copy of Partnership Deed, Certified true copy of Memorandum & Articles of Association (certified by Director) and Board Resolution.
Eligibility criteria fixed by the FI may include minimum and maximum age, minimum turnover, years in business, profit for last 'X' years, minimum annual income etc. In case of a new business the eligibility criteria and required document list might vary a little.
Professional loans are given to self employed professionals like CAs, doctors, lawyers, designers etc. The lender takes a detailed plan both about repayment and utilization of money, usually collateral is required for such loans.
Assessing the requirement accurately and a sound business plan are cornerstones to getting and utilizing a business loan well.