Everything You Need To Know About Business Loans

Whether you’re a budding entrepreneur or someone with an established business, you’ll need a significant amount of money to ensure that your venture is a successful one.

Of course, you could borrow the money from friends and relatives, issue shares to raise capital, or find venture capitalists willing to invest in your business. But all these sources of finance are difficult to access, and procuring the funds will involve sitting through a long process.

So what’s the next best alternative? A business loan. Here’s a rundown of all things business loan and how you can avail one.

What is a Business Loan?

A business loan is a form of lending that involves borrowing money for a business concern, whether a firm or a sole proprietor, to cover the various costs associated with running an enterprise. This includes the preliminary expenses spent on starting up the business, money spent to expand operations, and even funds procured to meet short-term goals of the business.

Unsecured and Secured Loans: The Difference

Based on whether you’re willing to offer an asset as collateral, there are 2 types of business loans you can avail.

Secured Loans

A secured loan is where you offer your lender some property as a form of security against the funds they provide. The collateral could be something like a piece of equipment in your factory, or even certain securities that your company has invested in.

The benefit of taking a secured loan is that lenders are often willing to grant you the funds at a lower rate of interest. Keep in mind, however, that if you fail to repay the debt, your lender is authorised to seize the asset that you’ve offered as collateral.

Before approving your loan, the bank or financial institution you approach will take a look at your asset to ascertain its value. Once they’ve settled on a number, you’ll be provided with a percentage of the value of your collateral as the loan amount.

Unsecured Loans

An unsecured business loan can be procured without having to offer an asset as security against the loan. Of course, it’s slightly more cumbersome to obtain one, and the rate of interest might be a tad bit higher than what you would pay on a secured loan. However, since you haven’t offered any collateral, there’s no danger of your assets being seized.

Figure out your exact requirements and determine the amount of money you’ll need as a loan. You may be able to avail a higher amount if you take a secured loan, but you risk losing your asset.

So assess your finances and figure out if you’ll be able to repay the loan instalments punctually.

Apart from secured and unsecured loans, here are a few other types of bank loans for business that you can utilise to expand your business operations.

Term Loans

This is the most common type of loan taken by businessmen. When you take a term loan, you’re borrowinga sum of money from your bank or financial institution with the understanding that you’ll repay the amountover a specific term, usually between 1 and 5 years.

The terms under which you’ll be granted this kind of loan vary based on a range of factors like the purpose of the loan, your credit rating, and whether the interest rate is floating or fixed.

For a bank to approve your application for a term loan, you’ll need to provide them with your reasons for taking the loan. You must also ensure that your business has a strong credit rating, and provide your lenderwith some form of collateral.

Equipment Loans

The term is quite self-explanatory. An equipment loan refers to an amount of funds borrowed for the purpose of purchasing some piece of equipment to improve the efficiency of your business.

Most equipment loans usually have a fixed repayment tenure, fixed interest rates, and fixed monthly payments. The maximum tenure for repayment is generally the expected life of the equipment itself.

This type of loan is a lot easier to procure than most other sources of funding. You’ll need to keep up the credit rating of your business and the loan amount will differ based on the type of equipment you’re planning to purchase.

In this case, the equipment itself is offered as collateral and your lender can repossess the equipment if you fail to repay the debt.

Line of Credit

A line of credit is like a flexible loan granted by your bank or financial institution. It’s similar to a credit card, where you have access to a specified amount of money that you can withdraw as and when required.

The benefit of this source of finance is that interest is only charged once you actually withdraw funds from your line of credit, and the amount needs to be repaid within a pre-specified period of time.

Of course, this isn’t the ideal source of finance for one-time investments, but can be used in your business operations to smooth out discrepancies in monthly expenses. It’s also a great source of finance to access during projects where you can’t figure out the exact amount of funding required.

Merchant Cash Advance

Have you got customers who often pay you by credit card? If so, then a merchant cash advance would be your best option. These loans require minimal paperwork and approval is granted within 24 hours.

Your lender will provide you with a loan as an advance, proportional to the expected credit card sales you’llbe making. You repay your lender by giving them a part of your credit card sales every day, along with a fee.

This method of financing tends to be more expensive when compared to other business loans, so only opt for it if you’re sure that the loan is worth the cost.

These are a few of the most common types of business loans that you can procure from a lender.

Documentation Process

The documentation process will vary slightly based on the type of business loan you’re looking for. However, there are certain documents that are mandatory if you’re looking for approval.

First off, you’re eligible for a business loan only if:

● You’re a public or private limited company● You’re a partnership or proprietorship firm● You’re self-employed and run your own business

You’ll need to fill out the application form and attach a photograph of yourself and your co-applicant (if applicable).

Your lender will also require details of your IT returns over the last 2 years along with your balance sheet and P/L account statement, Form 16A.

You’ll also have to furnish your bank account statements for the last 3 months. If you’re applying for a loan with a co-applicant, they’ll have to bring along their KYC documents. Finally, you’ll also have to provide a certificate of practice, to show that the business you’re looking to fund actually exists.

Once you’ve provided the necessary documents and signed the bank papers, your lender will grant you theloan.

If you’re looking to SME loan s for growing your business, the best way to go about it would be taking a business loan. It’s a simple source of finance, and will give you the support that you need to take your business to the next level.