Business Loan: Types, Eligibility and Documents
Business loans help enterprises manage working capital, buy equipment or expand. This page explains the general concepts for owners and first-time borrowers.
What is a business loan?
A business loan is money borrowed by a proprietor, partnership, company or other entity for business purposes, repaid with interest over a set period.
Common types
- Working capital loans for day-to-day expenses and cash-flow gaps
- Term loans for expansion, equipment or premises
- Equipment finance, where the equipment is often the security
- Overdraft or cash credit facilities against a limit
- MSME and government-linked schemes; check official scheme websites for current details
Eligibility factors
- Business vintage: how long the business has been operating
- Turnover: annual sales as shown in records and returns
- Credit history of the business and the owners
- Profitability and cash flow
- Existing debts
- Type of entity and industry
Documents generally required
- KYC of the business and owners
- Business registration proof (for example GST registration, Udyam registration or partnership deed, as applicable)
- Bank statements, usually of 6 to 12 months
- Income tax returns and financial statements
- Details of collateral, for secured loans
Interest rates
Rates depend on the lender, loan type, risk profile, security offered and business performance. Ask for the effective annual cost, including all fees.
Secured vs unsecured business loans
| Secured | Unsecured | |
|---|---|---|
| Security | Asset such as property or equipment | No asset pledged |
| Interest rate | Generally lower | Generally higher |
| Amount | Can be larger | Often smaller |
| Risk to borrower | Asset may be at risk on default | Credit profile may suffer on default |
Repayment
Repayment may be through EMIs, or in the case of overdraft facilities, through interest on the amount used. Make sure repayment fits your business cash flow, including slow seasons.
Important things to consider
- Borrow for a clear purpose and estimate returns realistically.
- Keep business and personal finances separate.
- Compare all charges, not only the rate.
- Understand personal guarantees and collateral terms.
- Keep accounts and GST and tax filings up to date.
Frequently asked questions
Can a new business get a loan?
Some lenders have minimum vintage requirements. It varies by lender.
What is business vintage?
The number of years the business has been running.
Does Finora provide business loans?
No. Finora.in is only an information website.