Loan Documents
Business Loan
A business loan is one type of a loan that is applied for by people who aim to establish, expand or buy equipment for their businesses.
Entrepreneurs who look for capital to begin their businesses also apply for business loans.
These loans are perfect for small businesses in India.
There are two types of small business loans in India:
1. Secured Business Loans:
These Loans are those which are taken against some type of personal guarantee or any valuable asset as collateral.
Inventory loans equipment loans term loan and loan
A secured business loan is when the individual provides collateral in the form of land, machinery, a house, etc, as security for the loan amount.
This has the added benefit of a lower rate of interest.
2. Unsecured Business Loans:
An unsecured business loan is when the loan amount is given without any collateral.
The interest rates for unsecured loans are generally higher as there is a risk factor involved for the lender.
Benefits of Business Loan:
1. Flexible Tenures
2. Minimal Documentation
3. Multiple loan options
4. Good Loan amount
Factors that affect interest rates for a small business loan in India:
1. Credit score:
A credit score is a three-digit number that ranges from 300 to 900. It shows your creditworthiness to your lender.
Lenders use your credit score to assess your reliability.
If you have a good credit score, then the interest rates for your business loan will be much lower.
What is considered a good credit score? How is my score computed credit score of 750 and above are considered a good score by most lenders.
So, if you have a low credit score, then your lender will consider you to be a risky customer and will increase the interest rate for the loan or reject your loan application.
Always ensure that you check your credit score before applying for a business loan.
2. Credit history:
If you have a long credit history that is good, then the interest rates that you will receive from your lender for your business loan will be low.
This is because your lender will view your past transactions with your past credit products to check your creditworthiness.
If you have a positive and long credit histrory, the banks will consider you to be reliable and will lend to you at lower interest rates.
If you have a bad credit history, the interest rates will be higher as you will be viewed as a risky customer.
3. Loan amount:
A large business loan amount entails a lower interest rate than a small business loan amount.
So, it is better to take a large loan for your business rather than a small loan as the interest rates will vary as per the loan amount that is taken by the customer.
Ensure you calculate all the needs and requirements of your business including the cost for labour, equipment, inventory and other costs.
4. Relationship with lender:
If you have a good and healthy relationship with the lender you are borrowing from and are an existing customer with them, then the interest rates can be negotiated for and one can get a lower interest rate.
This can help you lower the interest rates on your business loan.
Most lenders aim to please their customers and so they can lower the interest rates if you have a positive and long-term relationship with them.
Types of Business Loan
1. Term Loan
Term loan is offered under various types, such as short-term loan, long-term loan and other small business loans.
The loan amount offered under term loan depends on the applicant’s profile and business requirements that can be repaid in 12 months to 5 years, in the form of EMIs.
Term loan are divided into two parts, unsecured business loans, and secured business loans.
Secured loans require collateral to be submitted with the lender, which is not the case with unsecured business loans.
2. Working Capital Loan
Working capital loans are availed to meet the day-to-day business requirements or to manage business cash flow.
The working capital loan can be availed for various other purposes, such as business expansion, buying equipment or machinery, purchasing raw materials or goods, paying off salaries or rent, enhancing inventory, and much more.
Usually, the repayment tenure offered by most lenders is up to 12 months which shall exceed as per business requirements and the sole discretion of the lender.
3. Bill/Invoice Discounting
Invoice discounting is a financial instrument offered by Banks/NBFCs.
Bill discounting is a source of working capital finance for the seller of goods on credit.
It is a discount that a financial institution takes from a seller’s customer.
Through the payment being made by letter of credit, the buyer has the option of buying goods from the seller. Bills that come under bill discounting are termed Bills Of Exchange.
4. Letter of Credit (LC)
Letter of credit is a payment instrument used mainly in international trade in which the bank provides a monetary guarantee to enterprises that deal in the import and export of goods.
Enterprises doing business overseas have to deal with unknown suppliers and they require assurance of payment before performing any transaction.
Therefore, a letter of credit is important to provide payment assurance to the suppliers or exporters.
5. Point-of-Sale (POS) Loan / Merchant Cash Advance
Point of sale loan is a type of credit facility wherein merchants offer funding to their customers at the point of their purchase.
Business owners, Enterprises, MSMEs, Entrepreneurs, and Retailers can avail such funding.
Loans against POS machines to start a new business or to manage their existing businesses.
POS Loan, also termed Merchant Cash Advance is a loan type in which the sanctioned amount depends on the business volume generated via POS terminals.
6. Overdraft (OD)
An overdraft means overdrawing money from one’s current/savings account even if the account balance is zero or even below.
An agreed rate of interest will be charged if the overdrawn amount is within the limits of a preceding agreement.
The interest rate is charged only on the utilized amount of the total withdrawal or sanctioned limit.
Documents Required For Business Loan:
1. Signed Application Form
2. Identity Proof (PAN)
3. Residential Address Proof
4. Last 3 years ITR (self and business), profit and loss account, balance sheets certified/audited by a CA.
5. Last 12 months bank account statement (self and business)
6. Certificate and Proof of Business Existence
7. Business Profile
8. Office address-ownership/ lease/rent agreement/utility bill
Individuals | Firms, Partnerships | |
Identity proof | PAN card, Passport, Driving License, Aadhar Card, Voter id, Govt issued i-card | PAN, sales tax/ excise/ VAT/ service tax registration, Copy of partnership deed, Trade license, certificate of practice, registration certificate issued by RBI, SEBI |
Certificate and Proof of Business Existence | PAN, sales tax/ excise/ VAT/ service tax registration, Copy of partnership deed, Trade license, certificate of practice, registration certificate issued by RBI, SEBI | |
Address Proof | Passport, Driving License, Elecken ID card, Electricity/ Telephone/ Mobile bill/ bank statement (not more than 3 months old) | Bank statement, utility bill, Registry copy, lease or rent agreement, TAN allotment |
I) In point E, F, G & H above, if the flat / house is located in a registered society, the following.
Additional Documents are to be submitted:
- Society Registration Certificate
- Society Bye-laws.
- Share Certificate.
- Letter of allotment of flat / house / plot.
- Society NOC. (prescribed format available with our office)
In case of Builder APF or Reference:
- Agreement to sale with builder and the Registration Receipts.
- Blue print of the building plan attested by the corporation/ Town Planning authority and the commencement Certificate. The applicant flat should be marked in red colour for easy identification.
- Receipts of payments made to the builder. If cheque Payment then Bank clearance required.
- NOC from builder in prescribed format.
- Builder Demand Letter
Frequently asked Questions
Any credit score that is 750 or above is considered good by financial institutions.
The maximum credit score is 900 and any score close to it shall be preferred first by lenders.
Ideally, if you avail short-term loan then the repayment tenure should not exceed 12 months. However, it may increase as per the desired loan amount.
The maximum repayment period can be chosen up to 5 years depending upon the loan amount that may exceed as per business requirements.
GST plays an important role in getting business loans, as the more the GST is paid, the larger shall be the business volume.
Therefore, it becomes easy for banks to rely on such applicants or borrowers that pay their GST.
The minimum annual turnover criteria is defined by the lender and vary from bank to bank.
The pre-closure and part-payment charges vary from lender to lender.
It may be Nil from some Banks and may exceed up to 5% of the loan amount from others.
Ensure to check the same with your lender.
Some of the popular schemes include Mudra Yojana under PMMY, SIDBI LOAN, CGTMSE, PMEGP, STANDUP INDIA, STARTUP INDIA, NSIC etc.
Business Loan News- December 2022:
2022-11-02: Karnataka Bank Registers Net Profit in the Q2 of 2022-23
The bank has registered a net profit of 411.63 crores in the Q2 of 2022-23.
In the corresponding quarter, it saw 125.61 crores, thus registering a growth of 227.70 percent.
2022-10-18: SBI Credit Card Holders ALERT! State Bank hikes charges on EMI transactions, Rent Payments
In a move that may further make credit card usage costlier, the State Bank of India has revised certain charges for its credit card users.
The new charges will come into effect from November 15.
The processing fee on merchant EMI transactions has been revised to Rs 199+ applicable taxes from earlier Rs 99+ applicable taxes.
Processing fee on rent payment transactions will be Rs 99+ applicable taxes, said the bank.
022-10-18: SBI launches its digital banking unit in Goa
As part of the Union government’s initiative, a digital banking unit (DBU) of the State Bank of India (SBI) was inaugurated in Goa.
The initiative aims to ensure that the benefits of digital banking reach every nook and corner of the country.
The DBUS will offer banking products and services to the customers 24×7.
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