What is Business Loan: Meaning, Types & How To Apply?

Why Business Loans Are Essential for Entrepreneurs

Doing something you enjoy and making a whole career out of it is what many people dream of while working on a boring desk job day after day. What if we told you there is a way you can start your own business and make money using your talent without emptying your bank account? Yes, you heard that right.

Business Loans give you the opportunity to try your hand at being your own boss.

The trend of startups is experiencing maddening growth because it's easier than ever now to start your own business. As of 30th June 2022, India registered a rise of 15400% in the number of startups! If you are wondering why that is the case, let us tell you that Business Loans have a big role to play in this story.

What is a Business Loan?

A Business Loan is a financial product designed to provide entrepreneurs and businesses with the necessary funds to meet various operational and growth-related needs. Business Loan meaning involves borrowing money from financial institutions to invest in working capital, expand operations, purchase equipment, or manage cash flow. These loans play a crucial role in supporting entrepreneurs and businesses by ensuring they have the capital needed to thrive and scale.

Types of Business Loans

1. Term Loans:

Fixed loan amount for a specified period, ideal for long-term investments like purchasing property or equipment.

2. Working Capital Loans:

Short-term financing to manage daily operational expenses like salaries, rent, and inventory.

3. Overdraft Facility:

Allows businesses to withdraw more than their account balance, providing flexibility in managing cash flow.

4. Equipment Financing:

Loans for purchasing or upgrading machinery and equipment necessary for business operations.

5. Invoice Financing:

Advances are offered against unpaid invoices to manage liquidity issues.

6. Business Credit Card:

Short-term credit for operational expenses, offering flexible repayment options.

7. Startup Loans:

Special loans are designed for new businesses without extensive financial history.

Benefits of Business Loans

• Access to Capital for Growth: Enables businesses to invest in expansion, technology, and infrastructure.
• Flexible Repayment Options: Tailored loan terms to suit business cash flow.
• No Dilution of Ownership: Borrow funds without giving up equity in your business.
• Tax Benefits: Interest paid on Business Loan can be tax-deductible.
• Improved Cash Flow: Manage operational expenses and maintain smooth cash flow during challenging periods.
• Customised Solutions: Lenders offer loans tailored to the specific needs of businesses.

How Do Business Loans Work?

Business Loans are structured to meet various needs:

• To Expand Operations: Funds for scaling up, opening new branches, or diversifying products/services.
• To Manage Cash Flow and Working Capital: Ensures smooth daily operations without financial strain.
• To Invest in Equipment or Technology: Purchase or upgrade machinery and adopt advanced technologies.
• To Hire Staff or Train Employees: Allocate resources for recruitment and professional development.
• For Marketing and Promotions: Invest in campaigns to boost visibility and sales.

Lenders assess creditworthiness, financial health, and business potential before approving loans, ensuring funds are utilized effectively.

Factors That Affect Your Business Loan Interest Rate

• Nature of Business:

A profitable and non-blacklisted business enjoys favorable rates.

• Credit Score:

A higher credit score reduces the interest rate, reflecting strong repayment capability.

• Profitability:

Businesses with consistent profits and financial stability receive better terms.

• Repayment History:

A history of timely payments enhances credibility and leads to lower rates.

• Annual Turnover:

Higher turnover indicates robust business potential, attracting competitive rates.

Eligibility Criteria for a Business Loan

• Age and Experience:

Applicants must be at least 21 years old and at least 2 years of business operations.

• Credit Score:

A score of 750 or above is preferred for easy approval.

• Minimum Revenue/Turnover:

Businesses should meet the lender's minimum turnover requirements, often ₹ 10–50 Lakh annually.

• Required Documentation:

Includes KYC proofs, business registration, financial statements, and a comprehensive business plan.

Documents For Availing Business Loan

Here is a list of all documents required for availing Business Loans:

• Company Documents:

PAN Card, address proof, GST registration certificate, and other applicable registrations

• Proprietor/Partner/Director documents:

PAN Card, Aadhaar card, electricity bill, or rent agreement

• Income Documents:

Income Tax Returns and computation for the latest 2 years, Profit or Loss statement and Balance Sheet for the last 2 years, GST Returns

• Bank Account Statement:

12 months bank statement

How to Apply for a Business Loan?

Here are the steps to apply for a Business Loan effectively:

1. Steps to Prepare for a Loan Application
• Evaluate your financial requirements and determine the exact loan amount needed.
• Create a detailed business plan showcasing how the loan will be utilised.
• Check your credit score to ensure eligibility.
2. Choosing the Right Lender
• Compare options from banks, NBFCs, and online lenders.
• Evaluate interest rates, repayment terms, and additional benefits.
• Select a lender that aligns with your financial goals.
3. Documents Required for Application
• KYC Documents (PAN, Aadhaar, etc.)
• Business registration certificates.
• Financial statements (profit/loss statements, balance sheets).
• Bank account statements for the past 6–12 months.
• Income tax returns for the last two years.
4. Tips to Increase Approval Chances
• Maintain a high credit score (750+).
• Showcase stable income and profitability.
• Reduce existing debts before applying.
• Be transparent and accurate in your application details.

Following these steps can enhance your chances of securing a Business Loan with favorable terms.

How to Avail a Business Loan?

To avail of a Business Loan, follow these steps:

• Establish the Loan Amount Needed:
• Determine the exact amount required to avoid borrowing excessively or inadequately.
• Consider your EMI affordability and overall repayment capacity.
• Use a Loan Calculator:
• Leverage a Business Loan calculator to estimate the monthly EMIs and total interest payable.
• Plan the loan tenure that best suits your repayment capability.
• Compare Loan Options:
• Research different lenders for competitive interest rates and flexible terms.
• Submit Your Application:
• Apply online or offline, ensuring all required documents are attached.
• Approval and Disbursement:
• Upon approval, the loan amount is disbursed to your account, enabling you to fund your business needs.

Frequently Asked Questions

1. What is the use of a loan in business?

A Business Loan can be used for various purposes, including expanding operations, purchasing equipment, managing working capital, or funding marketing initiatives to drive growth.

2. What is the interest rate for a Business Loan?

Interest rates for Business Loans vary by lender and borrower profile, typically ranging from 10% to 18% annually. Rates depend on credit score, loan tenure and business stability.

3. Can startups apply for Business Loans?

Yes, startups can apply for Business Loans, especially with a well-drafted business plan, steady income projections, and a good credit history. Certain lenders also offer startup-specific loan products.

4. How is the interest rate on a Business Loan determined?

The interest rate is influenced by factors like the applicant’s credit score, repayment history, annual turnover, loan tenure and the nature of the business.

5. Is collateral mandatory for all Business Loans?

No, not all Business Loans require collateral. Many lenders offer unsecured loans, especially for small businesses, though these may have higher interest rates.

6. How long does it take to get a Business Loan approved?

Approval timelines vary but typically range from 3 to 15 working days, depending on the lender, application accuracy, and documentation completeness.