When you start a business, you take on a lot of responsibilities. One of the crucial aspects that you need to focus on is having enough money at all times. Business owners have to pay close attention to business financing for raw materials, daily costs, employee salaries, and other expenses. There will also be times when some delays will occur in receiving payments, and businesses must be financially prepared to face these situations. This is where a business loan can come in handy as one of the best business financing options available.
What Are Business Loans
A business loan is a popular form of business financing where lenders offer you money for your business needs in the form of a loan. You can use these funds for many things, including buying assets, paying for daily expenses, making payments to suppliers, and much more. But it is still a loan, and you need to repay it on time with interest. Hence, you need to consider a few vital aspects of taking a business loan before you make any decisions.
Types of Business Loans
There are many types of business loans that you can select from. All of these loans have their own benefits and can be used to meet your urgent financial needs. Some of the most popular business loan types are:
- Secured Business Loan: You need to pledge some assets as security or collateral with the lender to obtain this high-value loan.
- Unsecured Business Loan: You do not need to offer security to get this type of business loan.
- Working Capital Loan: This is a short-term loan meant to help you pay for the daily expenses of your business.
- Debt Consolidation Loan: If your business has too many loans and you are required to pay multiple EMIs each month, this loan can help you combine all of them into one EMI.
- Professional Loan: If you are a CA, doctor, CS, or any other professional, then this business loan can help you start your own business.
- Loan Against Property: If you need a high-value loan and have property to pledge, then this loan is preferable.
Business Loan Interest Rates
The business loan interest rate is the cost that you pay to take the loan. Your EMI for business financing includes the principal and the interest rate. Your business loan interest rate depends on various factors, such as:
- Loan Types: Unsecured business loans have higher interest rates compared to secured business loans. The reason for this is that the risk is higher for the lender since there is no collateral.
- Lender: The business loan interest rate depends on the lender. So, you must undertake in-depth research to find the best lender for your precise financial needs.
- Credit Score: If you have a credit score of 750+, then the interest rate will be lower. Whereas, with a credit score of 650 to 700, you will have to pay a higher interest rate.
- Business Type: The interest rate for your business loan can vary according to the nature of your business. MNCs, or big companies, will have to pay lower interest rates compared to start-ups, which have no track record.
- Location: Businesses located in a metropolis can obtain lower business loan interest rates. Businesses in smaller or remote areas may have to pay higher interest rates.
Business Loan Eligibility Requirements
Another crucial factor that you must know about business financing is the eligibility requirements. Every lender has a given set of rules against which they will compare your profile. Only if you meet the criteria, will you be eligible for a business loan. Here are some key eligibility requirements that you must know:
- Credit Score: You must have a good credit history and a good credit score. Your CIBIL score must be 700+ to get a business loan. There must not be any EMI bounces or defaults in your credit history.
- Business Age: Your company must be at least three years old. It is considered ideal if the company shows a growth trend during this time. Also, the venture must be a profit-making enterprise.
- Age: All loan applicants must be over the age of 23 but less than 65, and they must be Indian nationals.
- Work Experience: All applicants must have work experience of at least four years to be eligible for a business loan.
- Paperwork: You must have all the required documents ready with you to apply for a business loan. Some of the documents you must provide include:
- A business license
- GST registration
- Bank statements for 1 year
- GST returns for 1 year
- KYC documents for all applicants
- Income tax returns for 3 years
Business Loan Charges
Apart from the business loan interest rate, you also need to consider other costs associated with the business loan. These costs can add up, so you must factor them in while you make a decision. Some of the additional business loan charges are:
- Processing Fee: This is a certain percentage of the loan amount. In some cases, this can be waived as well.
- Foreclosure Charges: This is a percentage of the amount you must pay if you are prepaying the loan before its due date.
- Cheque Bounce Charge: If your EMI cheque is returned, the lender will levy this fee.
- Penal Interest: If your EMI is returned unpaid, then you will have to pay interest on the amount until it is repaid.
Getting a business loan is important for many business ventures looking to grow or expand their operations. Since business loans are a major commitment, it is necessary to conduct thorough research, including finding out about the different lenders and their business loan interest rates, before applying. To read more helpful articles about business loans and other business financing options, visit Piramal Finance and receive more information and guidance on business financing.