Business loan is a very important tool for providing financial assistance to a business entity. Through a business loan, funds are provided to the business entity for things such as purchasing equipment or inventory, financing operations, expanding the business, or covering short-term cash flow needs, so that no obstacles come in their business. Business loans are offered to business entities by banks, NBFCs, and financial organizations with different features.
There are differences in the amount of loan received, interest rate, loan repayment option, and other offers in all types of business loans. All financial organizations determine different criteria based on their own policies and consumer profile. Business loans can be secured and unsecured. In secured loans, loan companies have to keep their assets as collateral to take out a loan, while in unsecured loans, loans are given to the borrower based on their profile.
The interest rate in business loans can be fixed or floating. To repay the money borrowed for a business loan, equal installments have to be paid every month until the loan tenure is over. You can also repay the entire lump sum amount at the end of the loan term.
Type of Business Loan
Several types of loans are given to establish a new business, information on all such types of loans is given below.
A term Loan is a type of business loan in which the borrower receives a lump sum amount. This amount could be used to either expand the business or sustain it. A term loan is approved for a specified time and in that time the borrower is supposed to repay. This repayment is done along with interest on the principal.
This is a type of loan given by loan organizations to purchase equipment or machinery that is used in the business. The purchased equipment or machinery is used for the business, and it is kept as collateral until the loan is fully repaid.
Lines of Credit
This is a type of loan in which a business entity is provided with a credit facility that allows the business owner to borrow money up to a certain limit. Interest is only charged on the borrowed amount.
Business Credit Cards
Many financial organizations provide the facility of business credit cards to lend money to businesses. These cards allow businesses to withdraw money when needed and use it to purchase their business needs. Rewards and cashback are also offered when using these cards for expenses.
Yes! Business loans can be of both Secure and Unsecured types. Secure Business Loan is given to the loan recipient by mortgaging the property. If the borrower makes any kind of default in repaying the loan, then the loan companies recover the remaining loan amount from the property made collateral. No collateral is required for an Unsecured Loan. In this, the lending financial companies involve a guarantor in lieu of the assets of the company receiving the business loan. Giving loans under an Unsecured Loan is risky for finance companies. In this type of business loan, the loan is given on high interest.
You cannot take a business loan for your personal use. Business loan is always given to such business and business owner who wants to meet the expenses like working capital, equipment purchase, marketing and inventory of his business with the help of loan. Documentation related to the business is completed by the loan provider for giving business loan, only after which the loan is sanctioned. If you want a loan for your personal use, then you can apply for a personal loan for this.
Business loans are usually given on the basis of a good CIBIL score but getting a business loan with a bad credit score is a bit more difficult than usual. But in many circumstances loan is also available on a bad credit score. For this, you have some options like Small Finance Bank. You can take a loan at a high interest rate by getting your loan repayment capacity and financial stability analysed. Apart from this, you can take a credit line using the overdraft facility, in which the money is used But only interest is felt. Apart from this, you can also opt for a secured business loan.
Many factors go into the search for a good business loan. The types of business loans are working capital loan, term loan, line of credit, invoice financing etc. Under term loan, you get the entire amount of your requirement in one go. In working capital loan, you get a loan for a short period of time to meet the day-to-day expenses of the company. Through the line of credit, a credit limit is available for using money from financial companies and interest is charged only on the amount used.
After taking a business loan, if there is any default in repayment of the loan by a business, then its effect falls on the personal credit score according to the business of the company. There are many forms of business like Sole Proprietorship, Private Limited, Public Limited etc. If a Sole Proprietorship company makes any default in repaying the loan, then the owner of such a company will suffer the maximum loss of personal credit. After this, if a private limited company defaults in repaying the loan, then its responsibility will be on a personal loan guarantor. Such defaults lead to blacklisting of companies and they do not get loans in future.