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What is a Business Loan?

Finance received from banks or other financial institutions for the purpose of investment in a business by way of working capital and term loan is a Business Loan. The term loan is provided for capital investment like the purchase of plant and machinery, repairs of the existing plant and machinery, to build infrastructure, to expand the existing business, and any other requirement to take the business to the next level. The working capital finance is to meet the operational expenses like the purchase of inventory, hiring of staff, payment of utility bills, and so on.

Features of the Business Loan

The following are the key features of the Business Loan:

Purpose

To meet the financial requirements of the business. It could be for the purchase of new plant and machinery, to replace the existing plant and machinery, building infrastructure, expanding the business, and so on, that is required to take the business to a greater level. Also, working capital finance is extended to provide for the day to day operational cost of the business.

Quantum

The quantum depends on the project for which the finance is required. The assessment is based on the vision of the business which is depicted in the projected financial statements for years up to which the repayment is fixed, the profile of the promoters, expected cash flow from the business which will give an insight as to the repayment capacity. 

 

For projects where the loan required is above 2 Crores, the project appraisal will be done by a team of skilled persons from the Project Finance Department (PFD) of the bank/financial institution. Based on the viability report of the PFD and considering various other factors like the liquidity ratio, the DSCR, i.e., Debt Service Coverage Ratio, the Fixed Asset Ratio, etc., the quantum will be decided.

Interest

The rate of interest will vary from lender to lender and will be in the range between 11% p.a. to 20% p.a., depending on the loan quantum, the project for which the finance is sought, line of activity, the business sector, and the customer's profile.

Security

The security depends on the quantum of loan and also the business sector. For a loan up to 2 Crores to MSME Sector, no collateral security is insisted. The loan will be covered by the Credit Guarantee Scheme. Normally the primary security will be by way of hypothecation of the stocks and receivables if the finance is for working capital and hypothecation of the assets created out of the bank finance if the loan is for capital investment. Collateral security by way of residential/commercial property will be required. The agricultural property will not be accepted unless the finance is for agricultural and allied activities.

Repayment

The working capital finance is short-term finance provided for a period of 6 to 12 months which will be renewed on an annual review. The repayment period for term loans ranges from 3 years to 8 years and even till 20 years if the construction of business premises is involved.

Processing fee

Processing fee also depends on the nature of the activity and the business sector but generally will range from 0.25% to 2% depending on the bank/financial institution.

Pre-payment charges

Some of the lenders do not collect any pre-payment charges while others charge 2% to 4% on the outstanding balance.

Top Banks for Business Loans in India

The 5 top Banks for Business Loans in India are:

  • The Bank of Baroda
  • HDFC Bank
  • SBI
  • Axis Bank
  • United Bank of India
Name of the Bank Types of Business Loan Features

Bank of Baroda

  • Baroda 3-1 Tankerz Loan
  • Working capital finance
  • Baroda Arogyadham Loan
  • Composite Loan
  • Small Business Borrower
  • Baroda Vidyasthali Loan
  • Term Finance
  • Technology Upgradation Fund Scheme (TUFS)
  • Credit Linked Capital Subsidy Scheme (CLCSS) PSB loan in 59 minutes
  • Vendor Bill Discounting Product for Vendor/Supplier of Large Real Estate Developers
  • Baroda Overdraft for E-commerce Business
  • Commercial Vehicle Finance
  • Baroda E-Business Pack
  • Baroda Loan for Restaurants
  • Baroda Contractor Scheme
  • Baroda Property Pride
  • Baroda GST Receivable Card for MSME
  • NHFDC Refinance Scheme for Professionals
  • Baroda SME Loan Pack
  • Construction and Mining Equipment
  • MSME Capex Loan and Capex Card
  • Baroda Loan to Business Correspondents
  • SME Medium Term Loan Bills/Invoice Discounting Under Value Chain Finance

Purpose: The loan is given for working capital and capital investment requirements of a business.

Quantum: The maximum quantum of loan is up to 25 Crores and is based on the project for which is the loan is sought, the repayment capacity and the profile of the customer.

Interest: Competitive rate of interest linked to MCLR

Security: Primary hypothecation of stocks and receivable in the case of working capital limits and hypothecation of the assets created out of the finance for term loans.

Collateral security of residential/commercial land and building. Agricultural property is not accepted as collateral security.

Repayment: The working capital finance will be for 12 months with an annual review and the repayment period of term loan ranges from 36 months to 84 months.

Processing fees: As per the guidelines of the bank from time to time and will be communicated to the borrower in the sanction letter.

Pre-payment charges: As per the banks' guidelines from time to time.

HDFC Bank

  • Unsecured loan
  • Dropline overdraft facility

Purpose: Funding for business requirement

Quantum: The maximum quantum is 40 Lakhs and 50 Lakhs in some selected locations.

Interest: The rate of interest starts at 15.75% p.a.

Security: No security or guarantor required.

Repayment: Flexible repayment options ranging from 12 months to 48 months.

Processing fee: Processing fee at 2.50% of the loan amount with a minimum of 2,359 and a maximum of 88,500.

Pre-closure charges: Pre-closure not allowed during the first six months from the date of extending the facility.  If closed between 7 to 24 months, the pre-closure charges are 4% of the outstanding balance in the account. If closed between 25 to 36 months, the pre-closure charges are 3% of the outstanding loan amount and if closed later than 36 months, the pre-payment charges are 2% of the outstanding loan amount.

Axis Bank

Term Loan and Working Capital finance

 

 

Purpose: For capital investment and for day to day operational expenses.

Quantum: The maximum quantum of the loan is 50 Crores.

Interest: 14.25% p.a. onwards

Security: Prime Security by way of hypothecation of stocks and receivables for working capital finance. For Term loan, hypothecation of the asset created out of the finance. For Non-fund-based limits cash margin by way of Fixed Deposits. Lien will be marked on the Fixed Deposits.

No collateral security is required.

Repayment: The working capital finance will be for 12 months and will be renewed after an annual review. Flexible repayment options for Term Loan.

Processing charges: 2% of the loan amount

Pre-payment charges: Nil

United Bank of India

Both Term Loan and Overdraft facilities

Purpose: To meet business requirements

Quantum: The maximum loan quantum will be 50 Lakhs.

Interest: Interest rate linked to MCLR at MCLR + 4.25% at present 13.2%.

Processing charges: As per guidelines of the bank and will be communicated the time of sanction.

Pre-payment charges: 2.36% of the outstanding loan amount.

SBI

  • Asset-Backed Loan
  • Asset-Backed Loan Commercial and Real Estate
  • Cotton Ginning Plus
  • Doctor Plus
  • Export Packing Credit
  • e-Dealer Finance
  • e-Vendor Finance
  • Fleet Finance
  • Lease Rental Discounting
  • Open Term Loan
  • Warehouse Receipt Finance

Purpose: To meet the business requirements. The loan is provided to various segments of business, which is customised as per their requirement.

Quantum: The maximum quantum is up to 20 Crores.

Interest: Competitive rate of interest which is linked to MCLR and also depends on the security offered.

Security: For working capital primary security by way of hypothecation of stocks and receivables along with collateral security of residential/commercial property wherever required.

For term loan primary security by way of hypothecation of the assets created out of the loan and collateral security by way of mortgage of residential/commercial land and building.

Repayment: The repayment period ranges from 3 years to 7 years for term loans, and the working capital will be for 12 months, which will be renewed for further period on an annual review.

Processing Fee:

  • Nil or a loan up to 25,000
  • For a loan above 25,000 and up to 2 Lakhs: 550.
  • For a loan above 2 Lakhs and up to 10 Lakhs: 1,000.
  • For a loan above 10 Lakhs and up to 50 Lakhs: 0.40% of the loan amount.
  • For a loan above 50 Lakhs: Depending on the credit rating the processing charges ranging from 0.20% to 0.40% of the loan amount with a maximum of 40 Lakhs.

Pre-closure charges: No pre-closure charges for loans with floating interest.

For loans with a fixed rate pre-payment charges at 2% of the pre-paid amount and for pre-closure 2% of the outstanding principal balance in the account.

Types of Business Loans

The various types of Business Loans are as follows:

Working Capital Finance

Any businessman who is in the service/manufacturing business or retail/wholesale trading, imports/exports can make use of this facility. This facility is generally opted for when there is a liquidity crunch in the business due to irregular cash flow and funds are required for meeting the day-to-day operational expenses of the business or when there is a sudden increase in the volume of the business. Working Capital finance can be by way of a line of credit, overdraft, packing credit, post-shipment credit or even by way of non-fund based limits like Bank Guarantees and Letter of Credit.

This facility will be a revolving credit and can be used as and when required. The utilised amount can be replenished by depositing amount when the cash flow of the business improves. The biggest advantage in this type of finance is that interest is levied only to the extent of the amount utilised and for the period utilised.

Rate of interest is mainly based on the credit appraisal of the business. The working capital finance will be for a period of 6 to 12 months and will be renewed after an annual review. The prime security for working capital finance will be the stocks and receivables of the firm/Company. Collateral security may also be insisted by way of a mortgage of residential/commercial property. It depends on the lender and the quantum of finance.

Term Loans

These loans are given mainly for capital investment, which will be of long-term in nature. It could be for building the factory premises, improving the infrastructure, modernisation of the existing structure, etc. The quantum of loan involved in this facility will be high and will be disbursed in a lump-sum. The repayment period also will be longer and can range between 7 years to 20 years. The rate of interest will be based on the profile of the Company, Credit Rating, the quantum and period of the loan.

The prime security will be the assets created out of the finance and collateral security will be a mortgage of residential/commercial property. To apply for this type of finance, you should have a detailed project ready along with a business charter as to how the loan amount will be utilised.

Invoice Financing

This is a very lucrative way of arranging finance for a firm/company. The time gap between raising an invoice and the final payment can be anywhere between 60 to 90 days. During this time, the firm/company may face a liquidity crunch and might need funds for the day to day operations of the business. Banks/financial institutions do provide finance against such invoices for customers who have a long-standing relationship and have been availing credit facilities which have been conducted satisfactorily. Up to 80% of the value of the invoice will be provided as working capital funds and the remaining 20% will be provided when the final payment is received. Invoice financing will attract processing charges and interest as per the guidelines of the lender.

Equipment Financing

Equipment financing is popular in the manufacturing sector. Any manufacturing business will require some mandatory equipment for manufacturing the product. Such equipment will be financed by banks/financial institutions. Funding will be done for office equipment, healthcare equipment, medical equipment, construction equipment, etc. The quantum of finance can be more than 100 Crores in some cases. The funding will be project-based. The rate of interest will be very competitive as the quantum involved will generally be high. The repayment period will be anywhere between 3 years to 7 years. Security of the assets created out of the finance will be taken and collateral of residential/commercial property will be insisted on a case to case basis.

PMMY

PMMY, i.e., Pradhan Mantri Mudra Yojana, has been introduced to encourage entrepreneurship under the MSME Sector and to create employment for the youth of the country. A loan is provided both for service and manufacturing units. The quantum of loan will be between 50,000 to 10 Lakhs based upon the line of activity.

Stand-up India

Stand-up-India was introduced to encourage setting up of new ventures by candidates who belong to Scheduled Cast/Scheduled Tribe and to encourage women entrepreneurs. Entrepreneurs belonging to Scheduled Caste/Scheduled Tribe or the women entrepreneurs should have the major shareholding in the firm/Company to be eligible for funding under the scheme.

Eligibility Criteria for a Business Loan

The following are the common eligibility criteria for a Business Loan:

  • The applicant or the promoters of the business should be in the age group between 21 years to 65 years.
  • Proprietorship/Partnership Firms and Pvt Ltd Companies, Self-employed individuals/professionals engaged either in Manufacturing, Services or Trading, are eligible for the loan.
  • A business vintage of a minimum of 3 years with a minimum experience of 5 years in the line of activity will be required.
  • A minimum business turnover and a minimum annual turnover as per the ITR will be required. The quantum of the requirement will vary from lender to lender.
  • The firm/company should be profit-making for at least a period of 2 years

Documents Required for a Business Loan

The following are the common documents required for a Business Loan:

Type Documents Accepted

Proof of address of the promoters

Aadhaar Card, Voter's ID Card, Driving Licence, Utility Bills, etc.

Photo ID proof of the promoters

PAN Card, Passport, Voter's ID Card, Driving Licence, etc.

Proof of business

GST Registration, Trade Licence, Registration under Shop Act, Drug Licence, etc.

Income proof

Balance Sheet and Profit & Loss Account audited by an Auditor with Auditor's report.

Other documents

  • Partnership Deed in the case of Partnership Firm
  • Articles of Association, Memorandum of Association, and Board Resolution as per the format provided by the lender in the case of a Company.
  • PAN Card of Partnership Firm/Company
  • National and State Permit if finance is availed for a commercial vehicle.

Things to Consider Before Availing a Business Loan

Given below are a few tips to consider before approaching a bank/financial institution for a Business Loan:

Preparation of a business charter

Have a business charter which will not only create a good impression but will also increase your confidence since you are aware of what you are up to. The charter should contain the details of your business plans for the next few years, where does your business stands in terms of the present market scenario, how you propose to utilise the funds from the Business Loan, and what is the improvement such investment will bring as far as the profits of the business are concerned.

This will give an idea to the lender that you are aware of your business strategies and will be assured of the end-use of the funds.

Credit score

Be aware of the credit score of the promoters as well as the Company before approaching the lender. Credit scores indicate your repayment history. If both the Company and the promoters have a good credit history, it will be that much easier to get approval for a Business Loan.

Decide the quantum

The checklist should have details of the requirements that would be required to improve the business along with the difference it would make the business, in terms of generation of income. Knowing the right quantum of loan is also a mandatory requirement. The reason being the project should not be under-financed. If so, you will again face a financial crunch and will not be able to conduct the business the way it should be done to bring in sufficient income generation as laid down in your business charter.

Research for various lending options

You should do a bit of market research to understand the various options available for Business Loans in the market. Shortlist the banks/financial institutions that suit your requirement and also check for the interest rates and other associated charges for the loan. Look for the lender which does not have elaborate approval procedures.

Be aware of the documents required

Enquire about the required documents and keep them ready before applying for the Business Loan. There may be mandatory documents like certain approvals/licences/permits. If your business already has these things, then fine. Otherwise obtaining them would be a strenuous ordeal. So, make a checklist of the documents required and keep them ready before approaching the lender. This will make the approval process faster and easy for the lender.

Benefits of availing a Business Loan

There are various benefits of availing a Business Loan in the present scenario. Some of them are as given below:

  • With the thrust on entrepreneurship, which leads to the generation of employment, there are various schemes that have been introduced for Business Loans. There are special schemes for the MSME Sector without collateral security. So even businessmen who were deprived of loans due to non-availability of collateral security can benefit now with the Business Loans.
  • The repayment period fixed for the term loan is very flexible and will be assessed based on the Debt Service Coverage Ratio (DSCR), which gives an insight to the repayment capacity of a particular business establishment. The tenure ranges from 3 years to 20 years, depending on the cash flow of the business establishment.
  • The rate of interest is comparatively low and is based on the credit score, credit rating, loan quantum, and the profile of the Company.
  • At present, you can apply for a Business Loan online. The eligibility check will be done and if you are eligible, you will be called to submit the required documents to the lender for further processing. Now, the process involved for a Business Loan is not as complex as it used to be. The banks/financial institutions will not insist for collateral or a third-party guarantee for loans up to 1 Crore for which guarantee cover under CGTMSE is available. Availability of this guarantee cover has reduced the risk factor for the lender to a certain extent.

Charges for a Business Loan

Name of the Bank Processing charges Pre-closure charges Delayed payment penalty

Bank of Baroda

As per the guidelines of the bank

As per the guidelines of the bank

2% over and above the normal rate of interest on the overdue amount for the overdue period

HDFC Bank

2.50% of the loan amount with a minimum of 2,359 and a maximum of 88,500

  • Pre-closure not allowed during the first 6 months from the date of providing the facility
  • If closed between 7 to 24 months, the pre-closure charges will be 4% of the outstanding loan amount
  • If closed between 25 to 36 months, the pre-closure charges will be 3% of the outstanding loan amount
  • If closed later than 36 months, the pre-closure charges will be 2% of the outstanding loan amount

2% p.m. on the overdue amount for the overdue period with a minimum of 200

Axis Bank

2% of the loan amount

Nil

2% p.m. on the overdue amount for the overdue period

United Bank of India

As per the guidelines of the bank

2.36% of the outstanding loan amount

2% p.m. on the overdue amount for the overdue period

ICICI Bank

2% of the loan amount

4% of the outstanding loan amount

2% p.m. on the overdue amount for the overdue period

Bank of Maharashtra

0.25% to 0.35% of the loan amount

2% of the outstanding loan amount

2% p.m. on the overdue amount for the overdue period

State Bank of India

  • For a loan up to 25,000: Nil
  • For a loan above 25,000 and up to 2 Lakhs: 550
  • For a loan above 2 Lakhs and up to 10 Lakhs: 1,000
  • For a loan above 10 Lakhs and up to 50 Lakhs: 0.40% of the loan amount
  • For a loan above 50 Lakhs: Depending on the credit rating the processing charges may range from 0.20% to 0.40% of the loan amount with a maximum of 40 Lakhs
  • For a loan at floating interest: No prepayment charges
  • For a loan at a fixed rate: 2% of the pre-paid amount or for the pre-closure 2% of the outstanding principal balance depending on whether it is pre-payment or pre-closure

2% p.a. on the overdue amount for the overdue period

DCB Bank

2% of the loan amount subject to a minimum of 5,000

2% to 4% of the outstanding loan balance

2% over and above the normal rate of interest for the overdue amount for the overdue period

Syndicate Bank

  • For Priority Sector loans for a loan up to 25,000: No processing charges
  • For non-priority sector 250
  • For a loan above 25,000 and up to 2 Lakhs: 5 per thousand with a minimum of 750
  • For loan above 2 Lakhs: 400 per lakh with a maximum of 50 Lakhs

For Term Loan

  • For a loan up to 2 Lakhs: 0.50% of the loan amount with a minimum of 250 will be collected for non-priority sector and nil for priority sector loans
  • For a loan above 2 Lakhs and up to 100 Lakhs: 1% of the loan amount with a minimum of 2,500
  • For a loan above 100 Lakhs: 1.25% of the loan amount with a minimum of 1.25 Lakhs and a maximum of 100 Lakhs

1% to 2% on the outstanding loan amount

2% over and above the normal rate for the overdue amount

Canara Bank

  • For non-priority loans
  • Up to 50,000: 250
  • Above 50,000 and up to 2 Lakhs: 0.35% of the loan amount with a minimum of 550
  • For a loan above 2 Lakhs: 350 per lakh with a minimum of 1,000 and a maximum of 35 Lakhs in a year
  • Upfront fee for Term Loans
  • Up to 50,000: 250
  • Above 50,000 and up to 2 Lakhs: 0.50% of the loan amount with a minimum of 500
  • Above 2 Lakhs and up to 25 Crores: 1.25% of the loan amount
  • Above 25 Crores: 1% o the loan amount with a minimum of 30 Lakhs and a maximum of 75 Lakhs
  • 2% of the loan amount. If the loan is closed with own resources then there are no pre-closure charges
  • If the loan is sanctioned in an individual name then there is no pre-closure charge

 

 

2% over and above the normal rate of interest for the overdue amount for the overdue period

Frequently Asked Questions - Business Loan

What is the method adopted to calculate the eligibility for a Business Loan?

The eligibility check for a Business Loan depends on the following variants:

  • The credit score of the company/promoters is mandatory. Good credit score depicts the financial discipline of the Company/Promoters, which goes a long way in the credit decision.
  • The financial statements of the Company, which consists of the balance sheet and profit & loss account of the Company. Financial statement of the Company for the last 3 years and projected financial statements for the next year will give a brief idea about the income generation and performance of the Company.
  • The DSCR indicates the repayment capacity of the Company. The ideal DSCR should be between 1 and 1.5.

Will the Business Loans be given with the part-payment facility?

Yes. Part-payment facility after a certain lock-in period will be permitted. However, the number of times a part-payment can be made will depend on the lender. Also, part-payment charges ranging from 2% to 4% will be charged on the part-paid amount.

What are the modes of repayment of Business Loans?

Business Loans should be paid in Equated Monthly Instalments (EMIs) for which auto-debit instructions have to be given.

Will an overdraft facility be given against the security of immovable property?

Yes. Some banks do provide dropline overdraft facility against the security of the immovable property.

What is the maximum repayment period for Business Loans?

For working capital finance, the repayment will be on demand. It is normally for a period of 6 to 12 months with a further renewal facility on an annual review. For term loans, the repayment period will vary from 3 years to 20 years depending on the project for which the finance is availed.

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