Want To Apply For A Business Loan? Here Is Everything You Should Know

June 10, 2020 by admin

Money is all pervading the driving force for any business organizations. Right from starting a new business or expanding the existing one, money has all the important roles to play. Money for the business can be raised either through personal funds i.e. through savings & investments or simply by opting for a fresh business loan. Alternately the Initial investments required for the start-ups businesses can also be raised by finding suitable investors to invest in the start-ups.

An existing business looking for future expansion and acquisition can approach its relationship bank to raise the required funds via business loans. There are multiple lender banks and NBFCs who offer such business loans. However the loan applicant is required to fulfil the lender conditions before applying for business loans, which are:

The loan applicant must be self-employed with any type of company whether proprietorship, partnership, private limited or public limited.
The loan applicant must have a CIBIL credit score of 750 and above. (A CIBIL gives an entire track record of the applicant’s existing loans & the past loans.)
The loan applicant must have an active current account and all business transactions must route through this current account. For the small businesses that trades on cash must maintain a proper detailed cash ledger registers.
The applicant is required to maintain proper business transactions, average balances and savings in his banking account. This determines the EMI paying capacity of the applicant.
The applicant must maintain proper books of accounts – gross turnover, net profit, also the business contracts, business projections and cash folio ledgers. This determines the business loan eligibility.
For the loan applicants with higher obligations, in order to qualify for a business loan, seek an expert (on https://www.loanfasttrack.com/) to consolidate the existing multiple short term loans into a single secured loan. The higher obligation hampers the loan eligibility, consolidating to one will help reduce the EMI and qualify for maximum loan eligibility.
Business stability required – minimum 5 years of business continuity is mandatory.

Types of Business Loans

There are different types of business loans and each loan type comes with its own set of terms and conditions. Carefully consider the type of the loan that best suits the requirement, by analyzing the facts such as what & why the business needs the loan for, repayment terms that can be handled and importantly how much loan is required. Business loans are mainly categorized as either short term loans & long term loans OR secured loans & unsecured loans. A secured business loan is the loan taken for business by providing assets, fixed deposits, gold, shares, bonds, etc as collateral for taking the loan while the loan which is not secured i.e. which does not involve collateral is termed as unsecured business loans.

Apart from the categorization of secured and unsecured loans, business loan itself is of various types such as, equipment loan, term loan, overdraft, working capital, bank line of credit, business credit card, etc. However it can be broadly categorized into two types:

1- Professional Loans

2- Trade Loans

Both can either be short term or long term and or secured or unsecured in nature depending upon the terms and conditions of the lenders.

1- Professional Loans – Business loans given to professionals such as lawyers, doctors, architects, chartered accountants, etc. are termed as professional loans. These loans are usually long term in nature and have payback tenure of about 5-7 years.

Documents Required For Professional Loan Approval:-

KYC (Pan Card, Aadhar Card) self attested by applicant & co- applicant.
Last 3 years ITR with computation of income, profit & loss a/c, balance sheet, capital a/c self attested by CA along with membership number and USDIN number.
If secured loan – collateral required (Property, NA plots, government bonds, bank’s term deposits, national saving certificates, Assignment of Life Insurance Policies etc.)
Business Proof & Registration documents.
Latest 12 months banking statement of all banks.
Declaration for final end use of the money.
Business plan for future expansion.
GST return for 1 year- if GST is applicable.
26 AS copy for 2 years.

2- Trade Loans – Business loans given to the sole-proprietors, partnership firms and private ltd. firms are termed as trade loans which are mainly of three types -Term Loan, Overdraft Loan & Working Capital Loan.

I- Term Loan – A loan provided by lenders with a specific amount that has specified repayment loan tenure with fixed or floating interest rates is termed as term loan. The entire loan amount is disbursed in term loan and the EMI is fixed which is automatically deducted from the bank account through ECS/ Auto Debit. The term loans are medium to long term in nature 5-10 years. The purpose for which term loans are given are- for building constructions, buying and setting up machinery & equipment for official purpose, or buying commercial vehicles, etc. The term loan can also be extended to trading firms and manufacturing units.

II- Overdraft (O/D) – Overdraft means withdrawing from the bank’s account even if the account balance falls to zero. It is a facility to fulfil instant money needs of the business. O/D is given only on the current account of the account holder. The interest on O/D is charged only on the utilized amount and only for the time it has been utilized. The interest is calculated on a daily basis and is billed to the account at the end of the month. Overdraft facility, therefore is a line of credit (agreement between bank and the account holder) typically given based on the account balances of the account holder; such type of O/D is termed as unsecured O/D. When the O/D is available in the form of pre-sanctioned loans against the assets such as bank FDs, shares, bonds, insurance policies, properties or even against the ideal funds in the account such O/D is referred as secured O/D; the sanctioned O/D limit and the rate of interest varies depending on nature of assets offered as collateral.

The lender determines an applicant’s O/D eligibility by scrutinizing his financial documents & his business profile. The O/D comes with a renewal facility, if required the applicant may renew his O/D facility by paying the renewal charges.

III- Working Capital – A loan provided by the lender to finance a business’s / company’s everyday short term operational needs is termed as working capital loan. It is a type of secured loan and enjoys low interest rate in comparison to other lines of credit such as overdraft facility, etc. The interest is charged only on the utilized amount of the loan. The working capital loan is specifically utilized only for the business purposes. In this type of loan the lender gets a full control of monitoring the order book of the business with its debtors, receivables, cash flow, inventory, etc. The lender bank / NBFC also reserve the right to revoke the loan of the borrower if the defined set of expectations and parameters are not met as per the norms.

Documents Required For Trade Loan Approval:-

KYC (Pan Card, Aadhar Card) self attested by applicant & co- applicant.
Last 3 years ITR with computation of income, profit & loss a/c, balance sheet, capital a/c self attested by CA along with membership number and USDIN number.
If secured loan – collateral required (Property, NA plots, government bonds, bank’s term deposits, national saving certificates, Assignment of Life Insurance Policies etc.)
Business Proof & Registration documents.
Latest 12 months banking statement of all banks.
Declaration for final end use of the money.
Business plan for future expansion.
GST return for 1 year- if GST is applicable.
26 AS copy for 2 years.

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