Business Loans: Meaning, Types, Eligibility, and Documents

What is a Business Loan?

Business loans are loans available to businesses through banks, non-banking financial companies (NBFCs), and other financial institutions. These loans can be tailored to meet the requirements of expanding businesses, both large and small. They provide your company with the opportunity for growth and modernization essential for success in today’s highly competitive marketplace.

A business loan for the micro-small medium enterprises (MSME) industry in India is especially important, as MSMEs are key economic drivers of growth and employment creation, directly affecting the local economy. However, limitations such as the inaccessibility of formal financing, the need for collateral, and the lack of affordability for technological solutions hinder the expansion of the MSME sector.

While the Government of India has introduced various MSME loan and financing schemes to address the funding gap faced by MSMEs, the demand is greater than the solutions available. India boasts the second-largest MSME sector in the world, with more than 63 million MSMEs, the majority of which remain informal. According to an analysis by the Association of Chartered Certified Accountants (ACCA), around 80% of MSMEs (over 50 million businesses) cannot access formal loan channels.

Types of Business Loans

Financing for businesses can be complicated, especially in today’s highly competitive environment. Business owners often wonder about the most efficient way to finance various needs, such as purchasing assets, leasing property, buying new machinery, or covering operating expenses. Business loans can be broadly classified into two types, which are discussed below.

1. Secured Business Loans

Secured business loans are common ways to raise capital for small businesses. This type of loan is backed by collateral, such as a personal guarantee or the pledge of property or assets. The collateral assures the lender that the loan will be repaid within the agreed period. If repayment is not made, the lender has the right to seize the collateral. Secured business loans can be further classified into:

• Secured by Collateral: This involves pledging collateral, such as property mortgages, government securities, savings accounts and fixed deposit certificates, or valuable metals like gold.
• Secured by Personal Guarantee: This type of loan is secured through a partner’s assets, including real estate or gold.

2. Unsecured Business Loans / Collateral-free Business Loans

Unsecured business loans rely solely on the business’s creditworthiness without requiring collateral. They are assessed based on income, financial documents, and other key factors. Unsecured loans are beneficial for various reasons, including business expansion and inventory management.

Types of Business Loans Based on Nature

Business loans can be divided into five types depending on their nature:

1. Working Capital Loans:
   • Used to manage daily operational funds.
   • Helps in increasing cash flow by purchasing raw materials, paying employees, and meeting other expenses.
   • Flexiloans working capital loans range from ₹1 lakh to ₹30 lakhs, with repayment periods of 12 to 60 months and interest rates starting at 24% per annum.
2. Invoice Financing or Bill Discounting:
   • Ideal for small businesses with long gaps between invoicing and receiving payments.
   • Lenders provide funds against invoice amounts, covering up to 80% of the invoice value.
3. Equipment Finance or Machinery Loans:
   • Financing options for purchasing new equipment or upgrading existing machinery.
   • It offers tax advantages, with interest rates starting at 24% per annum, loan amounts up to ₹30 lakhs, and repayment terms of 12 to 60 months.
4. Loans for Women Entrepreneurs:
   • Designed specifically for women entrepreneurs to promote economic growth and stability.
5. Business Credit Card:
   • Useful for short-term financial needs and offers rewards for debt repayments.
   • Typically carries higher interest rates than traditional business loans.

Benefits of Business Loans

Business loans can play a pivotal role in the growth and stability of a company. Here are some key benefits:

1. Business Expansion:
   • Fund new locations, purchase inventory, or upgrade facilities without financial pressure.
2. Financial Flexibility:
   • Manage daily operations and unexpected costs, crucial for MSMEs with unpredictable cash flows.
3. Tax Benefits:
   • Interest payments on business loans are often tax-deductible, lowering borrowing costs and increasing profits.
4. Building Credit History:
   • Timely repayments establish a solid credit history, improving future borrowing terms.
5. Risk Mitigation:
   • An unsecured loan can provide a buffer during financial downturns.
6. Improved Credit Score:
   • Consistent repayment enhances both business and personal credit scores, aiding future financing opportunities.

Benefits of Taking Business Loans from NBFCs

MSMEs have historically relied on informal lenders for financing. Key advantages of NBFC loans include:

1. No Need for Collateral:
   • Many NBFCs offer unsecured loans, allowing for financial freedom without asset forfeiture.
2. Flexible Eligibility Criteria:
   • NBFCs often have less stringent requirements than banks, making financing more accessible.
3. Digital Loan Disbursal Process:
   • Fintech NBFCs provide 100% paperless business loans, with funds disbursed within 24 hours.
4. Improved Credit Score:
   • On-time repayments can enhance a company’s creditworthiness.

How to Calculate Business Loan EMI?

Calculating your EMI (Equated Monthly Installment) is crucial for informed decision-making. Use Flexiloans Business Loan EMI calculator by entering the loan amount, term, and interest rate for business loan to find your estimated monthly payment.

How to Apply for Business Loans?

Applying for a business loan with a reliable lender is straightforward. Follow these steps:

1. Visit the Lender’s Website:
   • Go to the business loans section on the lender’s website.
2. Start Your Application:
   • Click “Apply Now” and complete the application form with your business details.
3. Upload Required Documents:
   • Provide all necessary documents for KYC verification.
4. Complete Your Application:
   • Finalize your application by clicking the “Submit” button.
5. Approval and Disbursement:
   • Following an instant review, the lender usually approves the loan within 30 minutes and deposits the funds into your account within 48 hours.

By following these steps, you can effectively apply for a business loan and access the capital needed to grow your business.

Conclusion

Business loans are vital financing instruments that help cover immediate or anticipated costs, particularly for MSMEs seeking growth. They address short-term cash flow issues and fulfill various business requirements while offering numerous advantages, such as no collateral requirement, a smooth application process, minimal documentation, and flexible loan durations.