Rent agreement registered with respective authorities
Latest Gas or electricity bill
Salary slips for the last 6 months in case you are a salaried employee (In addition, you can provide IT returns for the past three years along with Form 16
IT returns for the past three years in case you are self-employed (Some banks accept two years IT returns as well)
Statement of A/c for the past 1 year where your salary is credited (in case of salaried people)
Profit and Loss statement and Balance sheet for the last two years in case of self-employed persons
Your Sales tax, GST registration certificates, if applicable
Partnership deed in case of partnership firms (if the applicant is one of the partners)
Certificate of Incorporation in case of limited companies(if the applicant is one of the directors)
|Other Important Document|
Loan application form duly filled in
Xerox copies of all property documents that can help establish the chain of ownership for the past 30 years
Encumbrance certificate for 30 years
Property tax paid receipt in case you reside in your own house (usually when you apply for Balance Transfer)
Business Loan Documents
If you are looking for funds for your business venture, then one of the best ways to ensure that you have the cash flow that you need is to apply for a Business Loan. There are various loan schemes that you can choose from, depending upon the type of business, the purpose of the loan, and the quantum of finance that you need.
In order to ensure that your Business Loan is approved and disbursed fast, you need to make sure that you complete the documentation process successfully. Here is everything that you need to know about a Business Loan, documents required for it, and completing the application process successfully.
What is a Business Loan?
Every business has a constant need for cash flow in order to take care of various overheads. In some cases, individuals or groups may even require additional funds to purchase equipment, goods, and even expand the premises of the business. Of course, in order to start a new business, a sizeable capital is required. Any finance requirement with respect to a business is fulfilled by a good Business Loan.
Banks offer these loans to individuals, LLPs, partnership firms, and even corporates to invest in their business. Depending upon the sector that the business is in and the type of finance that is required, there are various types of Business Loans that you can apply for:
- Overdraft: This is the perfect option for you if you are looking at immediate cash flow. These overdraft loans are usually provided against the current account of the business. In case of a sole proprietorship, you can also get an overdraft facility for your business against the savings account. This facility is provided against the security or based on your repayment history and relationship with the bank. You can utilise the limit available as per your requirement. The interest is only charged on the amount that you make use of and not the whole limit that is extended to you. Once you have made the repayment, the full limit is available to you for use again.
- Term Loans: As the name suggests, these loans are available for a fixed repayment term. The repayments towards the loan will be made in the form of EMIs or Equated Monthly Instalments. The interest charged on these term loans depends upon a lot of factors, such as the credit score of the business or the individual, the time of business, the collateral provided, and more. The relationship that you share with the bank is also an important factor in determining the amount that is extended to you. Term loans require collateral based on the quantum of finance for start-ups and existing businesses in the micro, medium, and small sectors. However, there are several government-aided schemes that are available with all banks across India. These loans are secured by a credit guarantee cover that ensures that the borrower does not have to provide any collateral.
- Working Capital: These are short-term loans provided to businesses to cover any immediate requirement of cash for business operations. These loans can be availed separately or against an existing loan or collateral. With working capital loans, the interest is only charged on the amount that is utilised, making it one of the most affordable options to meet immediate cash requirements. You also have the advantage of a lower interest rate in comparison to an overdraft facility that comes with similar features.
- Invoice Financing: This loan is provided against any outstanding invoice that you have raised for your clients. Pending payments on invoices can lead to cash crunch that may hamper your business. Based on the invoices raised, businesses can get close to 85% of the amount that is pending on the invoice.
- Equipment Financing: This is a special loan that is provided to help businesses purchase new equipment that is vital for their operations. These loans may require collaterals as per the quantum of financing that you need. In addition to that, the equipment itself is considered a movable asset that is used as primary security against the loan.
You can get both secured and unsecured Business Loans depending upon the eligibility criteria and the type of loan that you want to apply for. You also have the option of availing loans against security and even personal loans to fund your business if required.
Documents Required to Apply for a Business Loan
For any Business Loan that is provided, the documentation process is extremely important. These documents allow the banks and other financial institutions to confirm the eligibility of an individual or a business to apply for a particular loan. With the documents that are provided along with a Business Loan, banks are able to determine the following:
- The nature of the business and the type of business, whether it is a sole proprietorship, a partnership, LLP, or corporate.
- The viability of the business based on the financial documents and the business plan that is provided.
- The income of the business which determines the repayment capacity of the individual
- The qualification of the individual or individuals in the particular field that the business is functioning in.
- Proof of the existence of the business to eliminate the chances of any fraudulent transactions or misuse of the loan provided.
For each bank and each type of loan that you apply for, the documentation process may vary.
However, there are a few mandatory documents that you need to provide for any Business Loan:
- A duly filled application form along with 2 recent photographs of the primary applicants
- Identity proof including PAN Card/ Driver's License/ Passport/ Voter's ID, etc.
- Proof of income, which includes the latest income tax certificates, bank statements, etc. for the period determined by the bank.
- Audited balance sheet for at least 3 years
- Address proof such as utility bills, business registration certificate, rental agreement, etc.
- Proof of ownership of the business, including the declaration of proprietorship, partnership deed, MOUs, etc.
- Business plan along with projections for the term of the loan in case of new businesses or start-ups
- Documents associated with the collateral provided, such as property papers, Life Insurance Policies, etc.
Even after you have completed and submitted the application, the bank may ask for additional documents as per the requirements of the assessment process of the loan. The applicant is obliged to provide these documents in order to complete the application process completely and increase the chances of getting approval on loan.
Benefits of Applying for a Business Loan
A Business Loan is one of the best ways to ensure the smooth operations of your business. Here are some reasons that make a Business Loan one of the most recommended financing options for any enterprise:
- The disbursal of the amount is quick: In comparison to most other types of loans, you are able to get quick disbursals on your Business Loan to fund any immediate expenses. You can avail a large quantum of the loan in as little as 48 hours. You just need to ensure that you meet the eligibility criteria provided by the bank and complete the documentation process as required. If you have availed any loan with the bank previously or have a good relationship with the bank, you can get loans in no time for your business.
- You have easy access to working capital: One of the main advantages of a Business Loan is that you do not have to think twice about investing in new equipment, a new venue, or expanding the business. You can even have an easy cash flow to take care of regular business operations without any issue. As you continue to repay your loan on time, you can also avail a higher working capital for your business.
- You can get collateral-free loans: There are several instances when you can get a large loan quantum even without any collateral. If the premise of the business is owned by the individual or the primary applicant, for example, additional collateral is not necessary. You can also choose to get special government-aided loan plans that provide credit guarantee schemes. These schemes only require you to pay an annual fee each year without having to worry about providing any collateral against the loan.
- The interest rate is lower: In comparison to most loans, Business Loans give you the best possible interest rates. This makes Business Loan a much better option than a personal loan when you are looking for funding for your business. If you have a good credit score, you can further negotiate on the Business Loan interest rate to get the best deal for yourself.
- Tax benefits: Certain Business Loans can also provide you with tax benefits. The interest may be eligible for deductions when you are filing for your IT returns. Make sure that you check with the bank when you are applying for a loan to know about the tax benefits that come with it.
- These loans are flexible: The only condition for a Business Loan is that you need to use it for business purposes and not for your personal financial requirements. Besides that, the bank does not influence how you make use of the loan amount provided. You can use it for expansion of your business, to make payments towards salaries, manage overheads, purchase equipment, purchase any new equipment, or just about anything that is required for smoother business operations.
- You retain your profits: Unlike any other form of the investor in your business who can provide the same financial assistance, banks do not look for any portion of your profits. Even as your business continues to grow, the loan terms will remain the same and will make the repayments towards the loans easier over a period of time.
- Helps you build credit: One of the best ways to build credit is to ensure that you repay these Business Loans on time. The advantage of building credit is that you can get larger financing in the future if needed. This will not only help you improve your business operations but will also be extremely useful if you intend to expand your business.
Factors Affecting Business Loan Eligibility
The eligibility criteria that are set by the bank are the standards against which the loan is extended to the individual. These eligibility factors help the bank determine the credibility of the business and the individual when it comes to repaying the loan on time.
Some factors have a great influence on your eligibility for a loan, as mentioned below:
- The credit score: This is definitely one of the primary factors when it comes to applying for a Business Loan. The credit score is provided not only for individuals who are involved in the business but also for the business itself. This is based on any credit facilities that you have availed under the name of the company. Usually, a credit score above 750 is necessary to avail a Business Loan. The closer it is to 900, the better it is for you. If you have a high credit score, you have the advantage of being able to negotiate for a lower interest rate. You can also look for collateral-free loans that are more accessible and easier to avail.
- The time in business: This factor determines the market condition of the industry that the business is operating in. If the market is volatile, the chances of getting approval are lower. If you do get an approval on your loan, you may be required to pay a much higher interest rate. This is because the chances of repayment become uncertain. On the other hand, if the industry of your business is currently strong and performing well, you qualify for most Business Loans and can even enjoy much lower interest rates.
- The income generated by the business: One of the main concerns of the bank is the repayment capacity of the business or the individual. This is calculated by checking the income that the business generates each month. After all the mandatory expenses are deducted, the remaining amount must be sufficient for you to repay the EMI on time. With many banks, a minimum account balance is required for a certain period of time in the current account associated with the business. They may even ask for a minimum turnover in order to provide you with a loan. In some cases, Business Loans are only provided to companies that have earned profits for a period of 12 months at least.
Things to Keep in Mind before Applying for a Business Loan
When it comes to applying for a Business Loan, make sure that you consider various factors that may affect the repayment towards the loan. You must also understand the exact requirement in order to apply for a suitable loan.
Here are some factors that you need to consider when you apply for a Business Loan:
- The market condition or time in business: You need to ensure that your industry provides the scope to generate enough income in order to repay the loan in time. If you are not able to pay your loans back in a timely fashion, it can have a great impact on your credit score and the chances of getting any funding in the future. If you feel like there are chances of a dip in business, it is a good idea to wait it out before you actually apply for that loan.
- The interest rate and loan terms: This is certainly one of the most important factors in determining whether you can afford a Business Loan or not. You can even use tools like MyMoneyMantra EMI Calculator to check if you can afford the loan based on the interest rate that is charged. You can look for alternatives and other loan schemes that provide a lower interest rate to ensure that you are able to repay the loan. Even the repayment tenure is an important factor to consider. Most banks provide flexibility when it comes to the repayment tenure. However, you must remember that the longer the repayment tenure, the more the amount you will be shelling out towards the interest.
- The current overheads: Make sure that you list out all the mandatory expenses such as rent and salary. Then, deduct this amount from the income generated by the business. This is the best way to tell if the EMI on loan can be managed without any unwanted burden.
- Existing loans: If you already have several loans for your business, it is important to understand whether an additional loan is required or not. First, with each loan that you apply for, the credit score goes down. Of course, you can build that up with regular repayments. However, the more the loans, the bigger the repayment that you need to make each month. It is a good idea to make sure that you consolidate a few loans before you apply for a fresh one. You may even consider options like transferring the balance to a more affordable loan plan to reduce the burden of repaying the loan.
- Eligibility criteria: It is extremely important to consider the eligibility criteria before you apply for a loan. If you are not eligible for a loan, the chances of rejection are higher. This, of course, has a negative impact on your credit score. Therefore, make sure that you check all the eligibility criteria thoroughly and shortlist your loans accordingly.
FAQs - Business Loan Documents
What factors are considered in determining the eligibility for a Business Loan?
When you are applying for a Business Loan, your eligibility is calculated based on the following parameters:
- The credit score
- The qualification of the applicant
- The nature of the business
- The income and profit generated by the business
Can I make part payments on the loan?
If you generate more income or have access to more funds, it is a good idea to make part payments towards the loan in order to consolidate your debts faster. Some banks will allow you to make part payments on your loan. However, there may be a fee involved. You may also have a restriction on the number of part payments that you can make each month.
Is it possible to foreclose Business Loans?
Usually, foreclosure of loans is an option after you have made payments towards a fixed number of EMIs. Usually, pre-closure of the loan attracts a fee which can be between 2% and 5% of the amount that is outstanding. If the amount is higher than the interest that you will be paying towards the loan, it is a good idea to choose prepayments or to reduce the repayment tenure of the loan instead of foreclosing it. Foreclosure of loans can also have a negative impact on your credit score.
How will repayments towards the loan be made?
You need to make EMI repayments towards the loans by providing an ECS mandate for the current account of the business. You may also be asked to furnish a few post-dated cheques by certain banking institutions.
What if an EMI is missed on loan?
In case your ECS bounces, you will have to pay a fine for the same. In case of a single default or overdue amount, you will be contacted by the bank for a reminder. However, if the default is recurring, it will not only affect your credit score but may also require the assets pledged to the bank to be seized.
How long does it take for the loan to be disbursed?
After you have completed the documentation process, usually the disbursal of the loan may take between 5 and 7 working days.
How to avail overdraft facilities?
Overdraft facilities are usually provided against assets like fixed deposits and LIC policies. The limit extended depends upon the value of the assets that you pledge.
Can I get a Business Loan with a low credit score?
A Business Loan is provided for individuals with low credit scores if there is any collateral security provided against the loan.