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What is a Business Loan?

Updated on: 14 Dec 2021 // 29 min read // Business Loans
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Having the fund to run a business can be difficult, irrespective of its size and location. Business owners often find themselves in troublesome situations because of the lack of capital. Business loans come to the rescue in these situations and help the businesses move forward with no financial problem.

Irrespective of whether it is a new business you are starting, or you already own one, financial issues can crop up anytime. In these emergencies, business loans play an essential role. Therefore, the first step would be to understand what is business loan is and how it can help you have a sustainable business with no financial issues.

Definition of Business Loan

A loan given to business owners and potential business owners can be considered a business loan. It is used for the betterment of any business that goes through a financial problem. Loans are granted to business owners to recover from such situations and run their businesses smoothly afterwards. It can be regarded as funding support given to potential business owners and some established businessmen when they require it to overcome specific monetary, internal, or external issues.

A business loan helps business owners to meet all their urgent needs of growing their businesses, and therefore, it is crucial to understand what is business loan is and how exactly it helps the owners to have a smooth financial experience afterwards.

A business loan can be used in several ways. Potential business owners, who are aiming at starting their business, can get the necessary monetary help, and experienced owners make use of business loans to get over some emergency financial issues that they might be facing.

A particular percentage of debt is added to the loan after its sanction. The one who takes the loan has to repay it afterwards along with an interest rate. There are different year plans that let people choose how many months or years they want to repay the interest, and the interest percentage depends on that.

Benefits of Business Loan

After understanding and getting an idea of what is business loan is and how it functions, it is vital to understand the benefits as well.

The benefits of business loans are immense. There are a plethora of benefits that business owners get after getting a business loan. Some of the significant benefits that business loans offer are mentioned below.

  • Taking business loans is easy and convenient. Getting in touch with banks and potential lenders to discuss specific issues and future prospects can prove helpful when it comes to taking business loans.
  • Most lenders and banks offer reasonable interest rates, which makes it easy for business owners to make the most out of these loans.
  • Another massive benefit of taking business loans is that the lender does not require any extra commission (apart from the fixed interest rate) or profits from your business after they grant it. Investors, however, are more likely to expect a return or profits from your company in the future.
  • It is also possible to take multiple loans according to your business needs. One can easily apply for a business loan alongside a machinery loan and a term loan. It is convenient and easy, which eventually helps businesses survive and overcome all monetary issues.

Types of Business Loan

Business loans can be of several types, and according to the needs of the loan taker, they are granted. Some of the major business loan types are:

  • Term loan: It is one of the most common business loans is the traditional term loan. It is mainly granted to experienced business owners who have at least three years of professional experience. Their will to expand their business requires financial support and which is when business loans help them sustain in the industry.
  • Start-up loan: This type of business loan is often granted to potential business owners who have a plan to start their business. These business owners might not be well experienced in the field and have an extensive business past. The current turnover figures are taken into account while granting this loan. In most cases, young people end up taking this loan in order to start their business.
  • Working capital loans: These are considered small business loans to be specifically used to overcome a shortage of cash that a business may be facing in the middle of its professional journey.
  • Invoice financing loan: This loan is another kind of business loan that is granted to both small and experienced business owners. It is often used by the owners to provide their employees with timely salaries if they face specific financial issues with their clients.
  • Equipment loans: These loans are also granted to both small and experienced business owners. These loans are one-time support that helps owners invest in particular equipment for their organization to keep pace with the demands of modernization within the company.

These are some of the most common business loans that are granted by banks and other lenders and microlenders to support business owners overcome specific financial issues they face during their professional journey.

Why Should You Avail Business Loan in India?

Third-world countries like Bangladesh, Pakistan, and India seem to have a lesser privileged background. Business owners from these countries have to struggle way more compared to the businessmen who belong to the first world countries.

Starting and running a business in these countries is quite tricky, and it may come across as overwhelming to many potential owners. If you are an Indian who is aiming at starting a business in India, consider applying for a business loan. Other options like having an investor on board can be challenging to deal with in the long run.

How to Apply for a Business Loan?

If you want to understand how to apply for a business loan, try and understand what is business loan is and why it is the best option for you. 

Here are the top five ways to successfully apply for a business loan: 

The first step for you would be to analyze and evaluate the amount of money you need for your business.

  • Choosing the right kind of plan is the next step. Apply for a start-up loan if you are just starting out. Go for a traditional term loan if you are aiming at expanding your business. Consider going through all the options and types of business loans and then apply for the one you think would be ideal for you.
  • Analyze your credit score before you go ahead with the plan. Most banks require a minimum score of 680 for you to be eligible for the loan. If your credit score is 750 and more, you are sorted and can go ahead with your application.
  • Try and understand if your annual income is sufficient. Analyze all the options you have and go for the best deal with an ideal interest rate that is suitable for you.
  • If you do not have experience being an owner for at least two years, it may be difficult for you to get a business loan. Look for the best deal that will be beneficial for you.
  • Consider applying for a government-sponsored loan plan like an SBA loan, in case you are already a business owner who wants to expand the business in the future.

These are the basic necessary steps that you should take before going ahead with your business loan application.

Conclusion

Running a business can be really hard at times. Financial problems are something that all businesses go through at some point or the other. In today’s world, it is, therefore, vital to understand what is a business loan and why it is the best option for you to go for if you are a potential business owner in a third world country like India. Even experienced owners end up taking equipment loans, invoice financing loans, along many other plans that suit them. Analyze your business demands and future plans and go for the perfect deal that suits your needs.

FAQs

✅Can a 20-year-old take a business loan?

Ans: According to most banks and lenders, the loan taker has to be at least 22 years old to be able to apply for the loan plans.

✅Can I take multiple business loans at one time?

Ans: Yes, it is possible to apply for a machinery plan, a term loan, and a business loan together as per your business needs.

✅When should I take out a loan from a microlender?

Ans: If you have a bad credit score, one or even fewer years of professional experience in the field, and if you cannot take a traditional loan, consider taking a loan from a microlender.

✅What documents are needed to apply for a business loan?

Ans: Your identity proof, your business license, proof of single ownership/partnership, business financial statements, and tax details are required.

✅What business loans does the government give?

Ans: Some government-backed loans are SIDBI loan, Startup India, Yojna under PMMY, etc.