A business loan helps you acquire financing for your company's needs. These may include operational costs, the purchase of equipment, business expansion, and the launch of new ventures. Various financial institutions in India offer business loans. The two broad categories of these are secured (collateral-based) and unsecured (no collateral) loans. The interest rates, repayment schedules, and terms vary by loan type and lender offers.
Before applying for a business loan, you may need to understand the meaning of a business loan, its types, and eligibility criteria, and get all the essential documentation ready.
What Is a Business Loan And How Does It Work?
To finance business activities, you can opt for a business loan. Business loans help businesses keep their day-to-day operations running, buy new machinery, expand production to another site, and make vendor or supplier payments. When you apply for this loan, lenders evaluate your financial profile, such as the business credit score, turnover, and repayment capacity, and check your eligibility for the loan.
Repayment involves paying back borrowed amounts over a fixed period, along with interest, in the form of equated monthly instalments (EMIs). For certain types of business loans, like working capital overdrafts, cash credits, or invoice financing, repayment may be on a usage basis.
For example, working capital loans have a short repayment tenure of 6 months to 3 years, and term loans have a long tenure of 1-10 years, with some extending up to 10 years depending on lender policies and loan amount.
Business Loan Benefits
There are various benefits of a business loan in India, as follows:
- Growth without giving up equity: Business loans do not dilute your ownership; you retain full control of the company since no equity is given up.
- Quick capital access: Digital lenders may offer faster approvals compared to traditional banks, depending on the borrower's profile and documentation.
- No collateral required: Availability of unsecured business loans does not require collateral. It makes this loan suitable for small businesses and MSMEs.
- Flexible tenure: It comes with a flexible repayment term. You can easily choose between long-term and short-term repayment ability on the basis of your revenue cycle.
- Tax benefits: Applying for a business loan also provides you with tax benefits. The interest paid on this loan is subject to applicable tax laws and conditions.
- Flexible EMIs: Many lenders offer flexible repayment options to repay the loans based on business revenue and income cycles.
Key Features of Business Loans in India
The key features of business loans are given below:
- Ticket size: Various financial institutions may offer business loans with different loan amounts according to your needs.
- Repayment tenures: The business loans have flexible repayment tenures as per the loan type you are applying for. It helps you to easily choose tenure according to your repayment capability.
- Providers: There are various banks and financial providers in India that provide you with business loans at different business loan interest rates, loan structures, and tenures.
- Channels: You can easily apply for a loan through fully digital platforms and physical branches. Applying through digital platforms provides you with benefits, with less paperwork, fast approvals, and easier onboarding.
Types of Business Loans in India
Businesses can apply for different types of business loans based on their funding needs. The common business loan types are:
- Secured business loans: A secured business loan is a loan that requires you to submit collateral (like business machinery, property documents, etc) to the lender. You can obtain a higher loan amount through this loan, and the interest rate of a secured loan is comparatively lower than an unsecured loan.
- Unsecured business loans: Unsecured business loans don't require collateral. The lender provides you with this loan on the basis of your financial health and creditworthiness. Business loan rates for unsecured loans are generally higher than secured business loans.
- Term loan for business: Term loans for business are generally long-term loans for big projects like expansion or buying property. Terms can be short, medium, or long term, depending on the lender.
- Working capital loan: Working capital loans are loans used to manage your daily expenses, especially when sales are seasonal and payments are delayed. Interest rates vary based on lender type, borrower profile, and credit assessment.
- Startup business loan: A startup business loan is a popular type of Loan for new businesses and small businesses. It helps the entrepreneurs to expand their small businesses, run operations smoothly, and get flexibility in repayments.
- MSME-focused loans: The business loan for MSMEs is a government-backed loan for small businesses. It gives you financial support by giving you access to working capital and expanding your business operations. Government business loan schemes like MUDRA Yojana also provide loans up to ₹10 lakh for small businesses, with microloan offerings up to ₹50,000 under the Shishu category.
- NBFC business loans: NBFC business loans provide flexible underwriting for unsecured and small-ticket loans. Interest on this loan is higher than banks, around 15% to 28% per year. NBFCs often offer quicker approval timelines compared to traditional banks, subject to eligibility and documentation.
- Business loan for new business / zero-vintage entities: You can get this loan from many digital lenders. Lenders will assess your banking behaviour, promoter profile, and collateral before providing you with a loan. Traditional banks require your minimum business operating history of 2-3 years to get this loan.
Related Reading: Learn more about the various types of business loans in our blog “Different Types of Business Loans in India”.
Secured vs Unsecured Business Loans
Business loans are categorised into two types, secured and unsecured loans, based on the required collateral. Let us look at the key differences between the two:
Business Loan Eligibility Criteria
The business loan eligibility criteria in India are given below:
- Basic eligibility: Lenders may typically require a minimum business vintage of 1 to 3 years. Minimum turnover requirements vary as per the lender, but can start from ₹10 Lakh annually
- Minimum income requirement: You must meet the minimum income requirement of the lender
- Age requirement: You must be 22 to 65 years old to apply for this loan
- Citizenship: Borrowers are usually expected to be Indian citizens to become eligible
- CIBIL™ score: CIBIL™ score requirements typically start at around 650-700, with some private banks preferring 750 or above.
- Bank statements: You should submit 1 year of bank statements and GST returns of the previous six months to obtain a business loan
- Additional: Along with basic Business loan eligibility criteria, you should also submit ITR ( of the last 2 years), business licenses, and KYC to the lender to acquire a business loan.
Business Loan Documents Required
Here are the essential business loan documents you must have while applying:
How a Business Loan Helps You
A business loan is a suitable financing option for small businesses, established MSMEs, and entrepreneurs. You can easily apply for this loan if you want to expand your business, handle daily expenses, buy machinery, or for other business needs. There are various types of business loans available in India, including secured, unsecured, working capital, startup business loans, and MSME loans, each of which may fit your needs.
Business owners are advised to choose the right type of loan that fits their business goals and growth stage. Whether you are applying through banks, NBFC, or other lenders, you should compare business loan interest rate, repayment tenure, approval timeline, etc, and then make the right decision.
Explore business loans with Shriram Finance to fund your business needs today!
FAQs
Can self-employed professionals get a business loan?
Yes, self-employed professionals can apply for a business loan through financial institutions or banks. These loans help professionals fund their business activities, cover working capital needs, buy equipment, or expand their operations.
How long does it take for a business loan approval?
Usually, digital lenders and NBFCs take a few days to a couple ofe of weeks to approve your business loan application.
What factors affect business loan eligibility?
Factors that affect business loan eligibility include the business's financial health. These include revenues, cash flow, and profitability, credit score and history, business stability, and loan-to-value ratio. Lenders may also consider your industry, type of business, age, repayment history, and loan purpose before approving your loan.
Is collateral mandatory for a business loan?
Not always. You must submit collateral to get a secured business loan. But no collateral is necessary to obtain an unsecured business loan.
Are there government schemes for business loans in India?
Yes, there are government-backed schemes such as CGTMSE, PMEGP, Mudra, and Stand-Up in India that can provide you with a loan.