A business loan is one which is intended specifically towards business purposes, similar to all other loans,
this also is a creation of debt, and repayment along with added interest. Business loans are of various types
cash flow loans, business cash advances, mezzanine financing, bank loans, invoice financing, asset-based
financing and microloans are few to mention.
Bank can be applied for to various platforms online or offline. To mention a few are Tata capital, Bajaj Finserv etc.
Buisness loans can be of several types depending on the nature of business the amount required…
(I) Bank Loans
(II) SBA Loans
(III) Mezzanine Finance
(IV) Asset Based Finance
(V) Invoice Finance
(VI) Online lenders or non-traditional lenders
(VII) Micro loans
Bank Loans:
As the name suggests these loans can be obtained from a bank in traditional manners by assuring the bank some
security and providing a collateral but nowadays in some cases these loans can also be unsecured. In case of secured
loans the collateral may be lost if repayments are not made. The business’s account, balance sheet, business plan will
be probably asked to present in front of the bank as well as the principal credit histories may also be studied.
The loans provided by credit unions are also considered as bank loans the business loans obtained from credit unions
receive the second highest level of satisfaction from the borrower.
The growth and performance of banks and other lenders is affected by methods including business loan assessment,
monitoring, risk management, and pricing. These processes also happen to affect the access to finance for many
would-be borrowers. The management for Lending businesses have changed significantly over the recent years also the
information on which the lenders base their decisions are not the same any more.
SBA Loans:
This is not a loan maker agency but instead The US Small Business Administration or what we say as (SBA)
guarantees loans provided by individual or private lenders. The SBA 7(a) is the main SBA loan program
including both a standard and express option, loans upto 50,000USD are said to be Microloans, Loans
providing for finances for real estate or equipment and Disaster loans are 504 loans. The total 7(a) volume in
FY 2016 was accounted for $11,967,861,900 and the total 504 loan volume for FY 2016 was accounted worth
$2,517,433,000.
Mezzanine Finances:
If a loan repaid within given time and in full then a Mezzanine finance can effectively secure a company’s
debt on its equity, which allows the lender to claim a part-ownership over the business. These types of
finances allow the business to borrow money without putting up collateral, of course the risk of diluting the
principals’ equity share is a major one.
Asset Based Finances:
The asset based finances which were once considered the last resort for borrowers, has recently become a
hot choice among small businesses lacking of credit rating or for businesses not with a good track record that
are needed to qualify for other forms of loans. If cut the long story short this type lending involves borrowers
willing to get loans against one of the company’s assets and here quality of the collateral is of more
importance to the lender Instead of the businesses credit rating and future prospects. Borrowings can be
made against several types of asset, including plant, premises, receivables and stocks are few to mention.
Invoice Finance:
Nowadays specially from the past few years MSME’S aren’t able to get loans that easily from the banks or
through traditional forms. Invoice discounting or factoring is amongst the alternative options that are
gaining popularity, In this type of lending the borrowings are made against the outstanding invoice of the
company conditioned on showing new invoices will be created soon and the company will be able to raise
funds. Often there is a debate between factoring and discounting for which is best for the company – and
the answer to this depends upon what the company wants their customers to perceive them as. Factoring is
when the financing company charges interest on the loan until the invoices are paid off, and ownership of
the debtor ledger is taken by the financing company which also uses its own credit control team to ensure
repayment of debt. Invoice discounting is a process in which the businesses control their own ledger and
itself ensures debts are repaid.
Online lenders or non-traditional lenders:
As mentioned earlier with big market players like Tata capital and Bajaj Finserv coming online shows how the
online lending business has boomed in recent years and also there is a significant increase in the number of
lenders. In 2014 alone these online finances have generated an estimated $12 billion in small business loans,
in which $7 billion came from unsecured loans, where as the loans borrowed by small business accounted
for $5 billion. Every year since 2000’s non-bank lenders known for making loans to small businesses, their
outstanding portfolio balance has doubled. These online lending works in two ways either these firms
make loans from their own capital or they tend to use a marketplace model, where these online platforms
match borrowers to loan their products from a variety of lenders. Term loans, lines of credit and merchant
cash advance are a few popular schemes that the online lenders have on offer.
Microloans:
Microloans as the name itself suggests these are smaller loans. Loans of such category are often unlikely to
be made by the traditional forms of lending, and if they do so, the personal credit score of the business is
particularly given the most importance.
Secured and Unsecured Business Loans
Secured and unsecured are two types of business loans. In case of a secured loan, an asset has to be pledged
by the borrower against the debt pledges can be plant, equipment, stock or vehicles against the debt. The
lender may claim the secured asset in situations if the borrower fails to repay within given time. Unsecured
loans as we can easily understand by the term do not secure anything against the loan they do not have
collateral, though if the repayment is not made on time the lender will have a general claim on the
borrower’s assets. In cases where the borrower becomes bankrupt, then usually a smaller proportion of
their claims realized. As a consequence of above scenarios the secured loans generally tend to have a lower
rate of interest, when compared to unsecured loans.
Personal Guarantees:
To provide loans against personal guarantee lenders mainly require a principal with 20% or greater
ownership in the business. The personal assets of the guarantors is used by the lender to secure the debt in
cases of personal guarantee. If the borrower has a strong business credit scores and revenue then the
personal guarantee requirement may be waived off by small business lenders.
Registration Requirements
Following are the eligibility criteria that an applicant needs to fulfill:
✓ Age- the applicant must be between 25-65 years of age to apply for a business loan.
✓ Time- the applicant must be owning and running the business for atleast 3 years.
✓ Income tax- the applicants must have filed income tax for a minimum of 1 year.
Registration Documents Required
To apply for a business loan, the applicant would need to submit the subsequent documents:
⚫ Aadhaar Card/Voter Card/PAN Card/Passport as identity proof.
⚫ Ration card/ Electricity Bill/ Passport/ Lease Agreement/ Trade License as address proof.
⚫ (I) Balance sheet profit and Loss statement
(II)Bank account statement.
(III) A copy of income tax return for past 1 year atleast. As Financial documents.
⚫ Municipal tax payment receipt/ Registration document/ owner identity proof/ IT returns as ownership
proof for self employed professionals.
⚫ Partnership agreement/ ITR/ GST returns/ Shop Registration proof/ Identity proof of partners as
ownership proof for partnership/Entities.
⚫ ITR/ GST returns/ Bank statement/ Book debt/ Periodic stock as proof of ownership for self employed
non-professionals
⚫ Article and MOA of private limited company/ITR/ Shop registration/ GTS files/ certificate of
commencement as ownership proof for private limited company.