For a small business getting a quick business loan at lower interest rates is key to making the most of business opportunities. Today many young and dynamic people are keen to start a business but due to the unavailability of finance, they could not. In order to help them, I am here with a detailed guide on a business loan.
Business loans are given to proprietorship firms, partnership firms, private limited companies, or public limited companies. The most appropriate place to get a loan for a business is a bank, however, you can obtain a loan from a finance company also. The business loan amount, rate of interest, and features differ from bank to bank.
How many types of Business Loans are available?
Loan for New Business – You can get a loan for starting a new business under this category. The initial period is the most difficult for new business startups. Many banks prefer businesses to be at least 1 year older to give this type of loan.
Loan for buying Equipment – Purchasing equipment can be very expensive, whether you’re a new business or an existing one, having the money for everything you need can be a struggle. If this is the case, you can apply for an equipment loan which is also called known as equipment finance. This loan can be used for a variety of things, such as vehicles, equipment, machinery, and other tools that play a part in running your business.
Working Capital Finance – In order to fulfill your daily business requirement you can avail of working capital finance from the bank. This finance will be in terms of cash credit limit/overdraft.
Business Expansion Loan – This type of loan is given for business expansion. If you have already established your business and planning to expand your business you can avail a business loan for expansion. Assessment of this loan is done based on future cash flow. You can avail loans up to 1 Cr under this category.
Finance for Import & Export Business – An importer and exporter requires finance on time to grab business opportunities. If you are in the import/export business you can avail loan under this category. This loan also includes export credit, letter of credit, shipment finance etc.
How to Get a Business Loan to start a small business?
Getting a loan for starting a business is a difficult task. You need to prepare a lot before applying for a loan. Regardless of what type of business loan you are applying for, ensure that you have all materials for your loan approval before filling application.
Step-1 Write a business plan. The first thing which is required by every lender for the startup organization is a business plan. Your business plan shows that you have a concrete and profitable business idea that is expected to earn a good amount of money.
Step 2 Select the lender for the business loan. It is advisable to approach the bank where you have an existing account. Get all information about business loan like eligibility, approval process and timeline.
Step-3 Review the information given by the bank carefully, so that you can prepare for the application and other required documents for getting loan. Each lender use different creation for the evaluation of loan application. I will discuss about that in next section of my article.
Step-4 Once you have completed the application and other requirements, submit your application with relevant documents to bank. Don’t forget to attach business plan with your application.
Which Documents are required to avail loan for business?
- PAN Card – For company/individual
- Proof of Identity- Aadhar card/ Passport copy/ Driving License
- Proof of address- Aadhar card/ Passport copy/ Driving License
- Last 3 years audited financials along with audited report
- Three years of income tax returns
- Three years GST returns
- Copy of last 6 months bank statement
How much Business Loan I can get?
You can avail business loan up to 1 Cr if you are fulfilling the criteria of the bank. Bank consider following factors before giving a loan.
Bank demands “Collateral or Security” from you for the business loan. Collateral can be in the form of residential/ commercial or industrial property of liquid assets. Banks ask this security as they want to cover the risk before giving this loan. If you are able to produce collateral fulfilling bank demands you will get a loan.
Credit History –
Credit history is an important factor for getting a loan. A credit score is closely linked to the amount of loan you can get from the bank. If your credit history is good bank will be able to extend you loan easily.
Financial Condition of your company-
Bank will always check the current financial condition of your company. They will go through the profit and loss account and balance sheet. Bank will also look at the amount of capital you have invested and revenue produced by your company. If your company is in bad financial condition bank may refuse to give a loan.
Bank will also check the type of business you are in. If you are in the business sector which is likely to perform better your chance of getting loan approval is high.
Minimum Turnover and profit –
Your business turn over should be with some minimum value usually 20 lakh to 40 lakh. Your business must be profit-making since last 2 years. Interest rate of the business loan is usually in the range of 13-20%.
Do share your experience about getting a loan for business!