Business Loan

Business houses require funds to run the day to day activities as well as for making purchase of equipment, machinery and stock. Business loan may be availed from banks, financial institutions or other lenders with or without providing security. Usually a lot of paperwork is needed to take a loan particularly from a bank or a financial institution. However loan financing provides easy procurement of funds for business and fairly simple non-complex contract requiring timely repayment.

Benefits of Business Loan

Funds are necessary for a business for a variety of reasons from procurement of materials to purchase of equipment. There are several means of obtaining finance. However obtaining loans from banks and financial institutions is the most common way of procuring funds for a business due to its non-complex nature. The various reasons for obtaining loans may be:-

  • Simple contract: A loan agreement is usually very simple with non-complex terms and conditions.
  • Easy availability of funds: It is relatively easy to obtain a loan for anyone satisfying the requisite criteria and funds are quickly disbursed.
  • Simple repayment schedule: The loan agreement usually contains a simple repayment schedule requiring fixed installments to be paid on a monthly or a quarterly basis.
  • Reasonable interest rates: The interest charged by banks and financial institutions are usually quite reasonable and affordable.
  • CIBIL Score: Timely repayment of loan improves the CIBIL score of an entity. A good CIBIL score will ensure obtaining of loans easily with less security and low interest rates along with other benefits.

Eligibility of Business Loan

Usually the following criteria is to be fulfilled to be eligible to obtain a business loan from a bank or a financial institution: -

  1. Age of the Applicant: Usually the applicant is required to be at least 21 years old and not more than 65 years old. The age limits may however vary from bank to bank.
  2. Profit: For an existing business, the entity must be making profits for at least the last 2 years. For a new business the business must be promising with decent estimated and projected financial statements.
  3. CIBIL: CIBIL is a credit rating score that shows the credit worthiness of the loan applicant. A good CIBIL score makes it easier to procure a loan.
  4. Income Tax Return: The applicant is required to have decent income as shown in his Income Tax Returns for the previous few years.

Types of Business Loan

There are different types of business loans that one can apply for from a bank or financial institution. The main difference lies in the purpose of the loan and the nature of security.

 

Cash Credit: Cash Credit is a facility offered to a business to meet the working capital requirements. The inventory and sundry debtors of the business is kept as security. The drawing power of the applicant is calculated on the basis of the amount of security provided. Based on such drawing power the cash credit limit is determined. A cash credit account may be used by the holder as a normal bank account. He may make purchases or pay off creditors through the cash credit account. Interest is charged on a monthly basis on the amount drawn, and such interest is required to be paid regularly. The account holder has to submit monthly stock and debtors statements to the bank on the basis of which the drawing power is checked at regular intervals. Cash credit is arguably the most cost effective way to meet the working capital needs of the enterprise.

 

Overdraft: Overdraft facility is usually given on the basis of security in the form of bank fixed deposits. The rate of interest is usually determined on the basis of the rate of interest of the fixed deposit pledged in the name of the bank.

 

Working Capital Loan: This is a short term loan given to meet the working capital needs of a business. Unlike Cash Credit this is loan given for a short period of time and is required to be repaid either in timely installments or lumpsum on maturity.

 

Accounts Receivable Loan: This is a type of working capital loan which is given against accounts receivables. Accounts receivable are the amounts due but not received from the customers. In other words, the sundry debtors of the business act as security for this type of loan. Such loan is short term in nature.

 

Term Loan: This type of loan is usually given on a long term basis. Fixed installments are required to be paid for repayment of the loan. Such loan can be availed for various purposes such as procurement of machinery, purchase of land, expansion of business, obtaining of licenses etc. A fixed or a floating rate of interest may be charged depending on the agreement. This type of loan is most common for long term purposes.

 

Equipment Loan: This is a type of long term loan given to procure equipment, plant and machinery. Usually the equipment procured acts as security against such loan. Similar to any other term loan repayment is scheduled at regular intervals.

Loan under CGTMSE Scheme

New and Existing MSME may avail loan under the CGTMSE Scheme. The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was set up for providing credit guarantee to banks and financial institutions on loans given to MSMEs. Loans under this scheme are available with minimal primary security. Around 75% to 85% of the amount is guaranteed by the government. This scheme is however not applicable to retail traders, educational institutes, agricultural sector, training institutes etc.

Procedure

STEP 1: We consult with the bank / financial institution to choose the scheme of loan.


STEP 2: Once the scheme is selected, we assist the applicant in filling the loan application form and preparation of relevant documents.


STEP 3: The bank evaluates the submitted documents and proceeds with the valuation of the stock.


STEP 4: After the evaluation is complete, bank sends a sanction/approval letter and initiate processing of the application.


STEP 5: Legality of the documents are checked by the bank.


STEP 6: A technical inspection and estimation is done by the bank.


STEP 7: Signing of the loan agreement and disbursal of the amount.

Funds are necessary for a business for a variety of reasons from procurement of materials to purchase of equipment. There are various means of obtaining funds. However obtaining loans from banks and financial institutions is the most common way of procuring funds for a business due to its non-complex nature.

Usually the following criteria is to be fulfilled to be eligible to obtain a business loan from a bank or a financial institution: -

  1. Usually the applicant is required to be at least 21 years old and not more than 65 years old. The age limits may however vary from bank to bank.
  2. For an existing business, the entity must be making profits for at least the last 2 years. For a new business the business must be promising with decent estimated and projected financial statements.
  3. A good CIBIL score makes it easier to procure a loan.
  4. The applicant is required to have decent income as shown in his Income Tax Returns for the previous few years.

The various types of business loans are:-

  1. Cash Credit
  2. Overdraft
  3. Working Capital Loan
  4. Term Loan
  5. Equipment Loan etc.

The schedule of repayment depends on the type of loan. In case of term loans, usually interest is charged at fixed or floating rate and equated monthly installments (EMIs) are determined. In case of cash credit, interest is calculated on the outstanding balance and the same is required to be paid on a monthly basis.

Cash Credit is a facility offered to a business to meet the working capital requirements. The inventory and sundry debtors of the business is kept as security. The drawing power of the applicant is calculated on the basis of the amount of security provided. Based on such drawing power the cash credit limit is determined. A cash credit account may be used by the holder as a normal bank account. He may make purchases or pay off creditors through the cash credit account. Interest is charged on a monthly basis on the amount drawn, and such interest is required to be paid regularly. The account holder has to submit monthly stock and debtors statements to the bank on the basis of which the drawing power is checked at regular intervals. Cash credit is arguably the most cost effective way to meet the working capital needs of the enterprise.

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was set up for providing credit guarantee to banks and financial institutions on loans given to MSMEs. Loans under this scheme are available with minimal primary security. Around 75% to 85% of the amount is guaranteed by the government. All new as well as existing MSMEs can avail this scheme. This scheme is however not applicable to retail traders, educational institutes, agricultural sector, training institutes etc.

The nature of security depends on the nature of the loan. In case of a cash credit of a working capital loan, inventory or sundry debtors is primary security. In case of an equipment loan, the purchased equipment acts as the security. In case of a term loan taken to purchase land, the purchased land acts as security.

The banks may charge a loan processing fee at the time of processing of the loan. The amount may be deducted from the savings bank account of the applicant or may be added to the loan amount. Also in case of inspections by the bank at regular intervals, an inspection fee may be charged. In case of default in repayment of an installment, a penalty may be charged. In case of early repayment of loan, a prepayment fee may be charged.

Term loan is usually given on a long term basis. Fixed installments are required to be paid for repayment of the loan. Such loan can be availed for various purposes such as procurement of machinery, purchase of land, expansion of business, obtaining of licenses etc. A fixed or a floating rate of interest may be charged depending on the agreement. This type of loan is most common for long term purposes.

What’s included

  • Consultation and advice regarding loan
  • Complete assistance / preparation of paper works
  • Filing of Income Tax Returns for loan application (where return is not filed and not time barred)
  • Quick loan disbursal

Documents Required

  • Passport Sized Photograph of the applicant
  • Self-Attested copy of Proof of identification: Passport, PAN Card, Voter ID, Driving License, Aadhaar Card
  • Proof of address: Ration Card, Passport, Recent Bank Statement, Aadhaar Card, Electricity Bill
  • Income Proof: Copy of latest Income Tax Return, Latest Audited Financial Statements (2 years), Bank Statements (usually 6 months)
  • Business Proof: Trade License, Shop Registration License, Partnership Deed, Memorandum and Articles of Association, GST Registration Certificate etc.
  • Security: Documents to be submitted in respect of security such as Fixed Deposit Receipt, Deed of conveyance of property etc.
  • Any other documents as may be prescribed

Business Loan


A New Business loan can provide extra liquidity to your business under funds crunch. Get funds to buy inventory, infrastructure and expansion of operations with a transparent procedure at Filecrat. Just provide us with your basic details.

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