Business Personal Loan
If you are thinking of starting your own small business, a business personal loan could be of benefit to you. Funding and additional capital are required to keep your business up and running. This capital is necessary to assist with business expansion, meet financial goals, and cover unexpected costs.
A small business loan may be a suitable option for you to help you finance your business requirements.
What is a Business Loan?
A business loan is a financial tool that helps businesses to kickstart their operations, purchase machinery and expand their inventory. A business loan can also help with business-related costs and expenses. In exchange for the loan, the business borrower may agree to settle the borrowed amount with interest over a mutually agreed period.
Business loans come with a plethora of benefits such as offering access to capital to elevate business growth, cash influx, and tax benefits.
If your business does not qualify for financing such as venture capital or angel investments, a business loan could be an appropriate option for you.
In short, a business loan is a valuable financial tool for businesses looking to expand or meet their financial goals.
Types of Business Loans Available in the India
A business loan is a type of financing that helps businesses obtain the capital they need to start, grow, or sustain their operations. These loans can come in various forms, such as secured or unsecured business loans, lines of credit, and equipment financing.
For businesses to qualify for a business loan, the business must fall under certain eligibility criteria. Some important criteria include having a strong credit score, showcasing a business plan or financial statements, and indicating the ability to repay the loan.
The interest rates for small business loans completely depend on the lender and the borrower’s creditworthiness.
A business loan signifies a clear advantage such as offering quick access to capital, enhancing cash flow, and helping businesses boost their goals.
They come with tax benefits, as the interest paid on a business loan is tax-deductible.
Benefits of Business Loans
If you are a small business looking for an unsecured business loan, you should be aware of the benefits it brings to your plate. Here are some of the key benefits of business loans:
- Capital Inflow: A small business loan is a good option because it provides the borrower with capital inflow that allows the business to fulfill its financial requirements and make the most of the opportunities.
- Cash Flow Management: A small business loan helps the business keep a close eye on its cash flow by providing the required funds to cover all expenses and pay bills.
- Lower Interest Rates: Interest rates for small loans are lower than other forms of financing.
- Tax Benefits: The interest paid on a business loan is tax-deductible, providing businesses with tax benefits.
- Build Business Credit: Once you successfully pay back a business loan, it helps you build your credit score and initiate a positive credit history. This makes it easier to acquire financing in the future.
- Flexibility: Small business loans can be tailored according to the specific needs of your business.
What is the Business Loan Eligibility Criteria?
Your eligibility to attain a business loan varies depending on the specific policies offered by different lenders.
- Credit Score: The most important criteria to qualify for a business loan is to have a healthy credit score. A good credit score signifies that the borrower has successfully repaid his debts on time.
- Business Age: It is a compulsion with some lenders that the business needs to be operational for a certain period of time in order to qualify for the loan.
- Annual Revenue: It is a common practice for lenders to ask for businesses to have a certain amount of annual revenue to qualify for a loan.
- Business Plan: Having a well-thought-out business plan like the company’s long-term goals, financial projection, and financial execution, are considered for the application of a small business loan,
- Collateral: Some lenders require borrowers to provide collateral, such as equipment, real estate, or inventory, to secure the loan.
- Debt-to-Income Ratio: Debt-to-income ratio is the amount of debt in comparison to the borrower’s income. This is another major factor that is taken into consideration.
How Is the Interest Rate For a Small Business Loan Calculated?
The interest rate for a small business loan is typically calculated considering various other factors.
One of the most predominant factors is to closely assess the borrower’s creditworthiness. This is evaluated using their credit score, credit history, and financial stability. The length and tenure of the loan are other essential factors in small business loans.
The interest rate for small business loans may be fixed or variable. In the case of a fixed rate, the rate remains the same throughout the cycle of the loan. On the contrary, a variable rate keeps changing as per the market conditions.
Aside from the above, it solely depends on the lender if they wish to charge fees. This would certainly impact the overall cost of the loan. It is important to carefully review the terms and conditions of the loan offer and compare them with other deals at hand to select the most suitable option for you.
How to apply for a Business Loan?
If you wish to apply for an unsecured business loan, here are a few steps you must keep in mind:
- Research Lenders: Thoroughly research and compare lenders to find a small business loan that meets your specific requirements.
- Gather Documents: Keep all the necessary documents ready beforehand to save time. Some of which are your financial statements, tax returns, and business plan.
- Complete Application: Put special attention and care into filling out the loan application. This will contain your personal and business information, loan amount, and period of short-term loan.
- Wait for Approval: Be patient and wait for the lender to evaluate your application and determine whether you meet the eligibility criteria.
- Receive Loan Offer: Once you successfully complete these steps, your loan approval process will begin.
- Accept the Offer: Be attentive and carefully review the offer and its terms and conditions before accepting.
- Receive Funds: Once you receive the loan offer, the funds will be disbursed to your business bank account within a few days.
What is the Business Loan Application Approval Process?
Your small business loan application process is dependent on several steps and procedures. After the successful submission of your loan application, it is upon the lender to go through your application and ascertain your creditworthiness and overall risks involved in lending out his money. This step involves appraising your business’s financial history, credit score, and collaterals.
In some cases, the lender may ask for additional documentation such as bank statements, tax returns, or business outlines. The lender may then approve or reject the loan application. If approved, the lender will offer a loan which will include the loan amount, interest rate, and loan terms. If the borrower agrees, they may go ahead and accept the offer. However, one should carefully go through the terms and conditions before accepting the loan. It’s important for business owners to carefully review the terms and conditions of any loan offer and ensure they can make the required payments before accepting a loan.
Frequently Asked Questions (FAQ)
Small business loan interest rates depend on a number of factors such as the type of loan, the borrower’s creditworthiness, and the lender’s policies.
In India, the Reserve Bank of India (RBI) sets the benchmark interest rate. This is the rate at which it lends money to the bank. In turn, banks decide their lending rate based on the benchmark rate and other critical factors such as the borrower’s credit score and the loan amount. As of April 2023, the RBI’s benchmark interest rate is 4.50%.
It is imperative to carefully research and compare various lenders’ interest rates and terms before applying for a business to ensure you get the best deal.
There are several factors involved in calculating the interest charged on a business loan.
The interest rate is usually expressed as an annual percentage rate (APR), which is the rate charged by the lender for borrowing money.
The interest calculated on a business loan depends on several parameters. These include simple interest and compound interest. In simple interest, the interest is calculated only on the principal amount borrowed, while in compound interest, the interest is calculated on the principal amount plus the accumulated interest.
The majority of banks and financial institutions at present are decreasing the balance method to calculate interest in business loans. As per this method, the interest is calculated solely on the outstanding loan balance after deducting the amount of each EMI (Equated Monthly Installment) paid.
The repayment terms for a business loan in India differ from lender to lender, the type of loan, and the borrower’s creditworthiness. In general, business loans have a term period ranging from 5-7 years, but some lenders may offer longer or shorter repayment periods.
It is a necessity for most businesses in India to repay the loan in Equated Monthly Installments (EMIs). This includes both principal and interest components. The EMI amount is calculated based on the loan amount, interest rate, and repayment tenure.
Some lenders may offer flexible repayment terms, such as the option to choose an EMI amount or repayment cycle, in sync with the borrower’s cash flow and business requirements. However, this flexibility may cost more.
Absolutely! In fact, if you choose to pay off a business before it is due, you can significantly reduce the total interest payable and shorten the loan tenure.
Most lenders in India offer a choice to the borrower that allows them to prepay their business loans without any penalty or charges. But, some lenders have a mandatory lock-in period before they allow the prepayment feature.
Borrowers can choose to make a lump sum prepayment or partial prepayments towards their loan. This depends on their cash flow and financial position. Partial prepayments are also beneficial in reducing the interest burden and the EMI amount.
However, before you opt for prepayment, check with the lender regarding any prepayment charges. It is also advisable that the borrower should calculate the potential savings on interest and compare it with any prepayment charges.
If you miss a payment on your new business start loan, it can land you in trouble, both financially and legally. The exact consequences depend on your lender’s policies.
The lender has full authority to charge a penalty or late payment fee for a missed payment. This fee depends on the loan amount and the delay caused.
If you happen to miss your payment, it can severely impact your credit card and make it difficult for you to borrow in the future.
With continued missed payments, the lender has full capability to take legal action against you. Such actions include sending legal notices, filing a case in court, and seizing any collateral offered against the loan. In extreme cases, the lender may also initiate recovery proceedings, which can harm your business reputation and financial standing.
Therefore, if you anticipate difficulty in making payments, it is best to inform your lender beforehand and explore options like restructuring the loan or opting for a repayment holiday.