Business Loan

Any entity engaged in a lawful activity which generates recurring revenue is eligible for Business Loan. The following types of individuals or entities are eligible for a Business Loan:

• Sole Proprietorship or Professionals acting individually
• Partnerships firms or Limited Liability Partnerships
• Private and Public Limited Companies
• Trust and society

Turnaround time, in short TAT, is the time required for the lender to process the loan application. TAT starts from the login of the file and ends with loan disbursement.

Business Loan is unsecured lending, where the funding is done based on the financial strength and non-financial qualities. Since there is no collateral is offered, time is saved by avoiding valuation or title check of the collateral security.

Sanction or Rejection of a Business Loan is decided in 3 working days. One must keep in mind, providing a full set of documents and information in one go, helps the lender to decide faster. On acceptance of the Sanction and signing of the loan agreement, the amount is disbursed to the borrower. So, the total time taken from signing the application form to fund in borrower account can be completed in 7 days.

Loan Tenure is dependent on Risk Profile, Credit Score and scheme etc. Business loans are short term in nature and are offered generally from a minimum of 12 months to a maximum of 36 months. Few of the lender offers 48 months tenor to selective borrowers.

In case of funding against credit cards, swipes tenure offered is 6 months to a maximum of 24 months. Professionals get a maximum of 5 years of repayment option.

Loan amount ranges from Rs.5 Lakh to Rs.1 Cr including group exposure.  However, for more than Rs.20 Lakh of loan, it can be availed depending on the financial capability of the borrower. That is, the borrower should have enough Income to service the existing and new loan or under Credit Card swipes product.

The repayment of the loan should be made according to the repayment schedule of the lender through banking mode.

A lender and borrower can agree on the repayment mode according to convenience. Repayment of EMI can be made through NACH, ECS or SI. The lender set the repayment mode for each loan account to ensure automatic repayment on a specified date. If payment is not cleared through the set process, it is termed as default in payment.

The lender generally collects un-dated PDCs for security purpose and may present whenever EMI get bounced or to take legal steps to recover the outstanding loan.

Businesses which have been established for more than 3 years are considered stable, and business entities which are more than 5 years are most preferred by lenders. A business which is less than 3 years old has fewer lenders as options and limited schemes to choose from. However, Lenders have started offering innovative schemes through holistic risk assessment to accommodate businesses having quality cashflow management with better future prospective.

Borrowers having borrowed multiple loans in the last 6 months affects adversely to the further loan taking ability. The borrower may not have eligibility or lenders may perceive the borrower as a frequent borrower and of a risky profile. Generally, lenders prefer borrowers having not more than 3 business loans in the last 3 months.

Rate of Interest is positively correlated with risk involved in the lending. The guiding factors which govern risk and in turn, Rate of Interest are Credit Score, Loan amount, Tenure, Risk Profile, scheme etc.

Since business loan is unsecured and for shorter tenure, it attracts a higher rate of interest and is in the range between 16% to 24%. However, in the case of Loan to Professionals, the rate is ranging between 10.5% to 15%. Loan against card swipes attracts a higher rate, which could be upward of 24%. Business Loan as a product offers a fixed rate of Interest through the tenure of the loan.

The charges for availing loan may include Processing Fee, Documentation Charges, Stamping, Affidavit and Notary fee etc.

Certain charges like Documentation Fee, affidavit and Notary fees are absolute figures, whereas Processing fee is a percentage of the loan amount.

Documentation, stamping, affidavit and notary fees put together ranges from Rs. 2000 to Rs. 5,000 and Processing fee ranges from 2 to 2.50% of the loan amount.

All these charges are borne by the borrower. The borrower either pays upfront or the same is deducted from the loan amount.

Multiple business entities having common promoters, income from those entities can be combined to get higher eligibility. The lenders insist on taking all the entities considered for eligibility calculation as parties to the loan structure.

Having existing loan helps in building credit score of a borrower. Higher the credit score, higher the chances of getting the loan sanctioned. Borrowers having multiple loans and frequent loans reduces eligibility and lenders find the borrower risky. Hence, lenders prefer to evaluate such borrowers more stringently than a borrower with fewer loans.

Business Loan has the following features to make it one of the popular lending products among Small and medium enterprises:

Easily accessible: Multiple lenders are offering simultaneously Business Loan to any enterprise. A borrower can avail from multiple lenders at the same time without affecting his credit history.

Flexibility: The easy EMI option provides the much-needed flexibility to repay over time, without burdening current cash flow

Collateral-Free: One of the notable features of Business Loan is collateral free. Businesses with no co-lateral or exhausted co-lateral find it handy in time of emergency.

Faster TAT: A Business Loan is disbursed in 7 days from application. This makes it an ideal product for emergency management.

Competitive interest rates: Because of the growing competition among lenders, the interest rates on Business Loans are quite reasonable. One can avail Business Loan without worrying about huge repayments.

No end-use monitoring: Business loan comes with no end-use monitoring. However, fund from such loan cannot be used for investing in the capital market or speculative transactions. Other than this reason, one is free to use the fund for any purpose.

Business assets are safe: Lenders often turn to the seizure of business properties in case the borrower is unable to repay a secured loan. Since there is no collateral hypothecated to the lender, there is no possibility of seizure of a property.

Loans taken in a business name are part of the Balance Sheet. Interest on a business loan is charged to Profit & Loss Account and are allowed as business expenses under the Income Tax Act.

Easy availability, collateral free and repayment through instalments, makes BL a preferred loan product. However, following points to be considered before availing Business Loan:

Higher rates of Interest: As BL is a collateral-free loan, lenders per see this as a risky product. Hence, lenders usually charge a significantly higher rate of interest on unsecured loans to offset the risk, as compared to a secured loan.

Smaller loan amount: In absence of collateral, most lenders restrict the lending to smaller amounts as compared to a secured loan. Here, aagey.com can help in getting the desired BL through the proprietary evaluation model.

Shorter Tenures: To minimize the risk, the lenders allow a shorter repayment schedule for the borrowers. For the very same reason, it is also difficult to get repayment term extension.

Personal Liability: All BL requires a personal guarantee. Though it is collateral free, lenders can take legal action against defaulting business as well as guarantor.

Generally, the loan will be disbursed in the name of the firm or company. However, based on the income of the partnership firm or Pvt Ltd company, the promoters may borrow in their capacity. The lender may insist on taking the entity as a party to the loan structure, and suitable security PDC as an additional precaution to mitigate the risk.

The business loan comes without end-use monitoring. The lender does not monitor the use of the fund once disbursed. However, such fund cannot be utilized for investing in the stock market or speculation transactions.

Business Loan is available in two forms. One as clean Term Loan, repayable in monthly installment over the tenure of the loan and second is overdraft limit, which reduces every month. The overdraft facility is also offered by NBFCs. A borrower having overdraft facility has an advantage of paying interest on the used fund only. ( utilized)

Top up is the loan facility given by the lender based on servicing of an existing loan.

In case of BL, if the borrower has paid 6 to 12 months of the sanctioned tenor, the lender may offer an additional loan. Such additional loan is called Top Up and is again subject to verification of income documents and other eligibility criteria laid down  by the Lenders.. The top-Up loan may amount to the closure of the existing loan and starting a new loan account.

Neither NRI nor OCI are not eligible to borrow Business Loan.

Generally, the loan will be disbursed in the name of the firm or company. However, based on the income of the partnership firm or Pvt Ltd company, the promoters may borrow on their own capacity. The lender may insist on taking the entity as a party to the loan structure, and suitable security PDC as an additional precaution to mitigate the risk.

Loans with higher Rate of Interest or with unfavorable terms and conditions can be replaced by a new business loan with a lower rate of Interest or longer tenor or conditions more suitable from other banks. Many times, closing a loan before maturity attracts pre-payment penalty. One must evaluate the option of shifting the loan, keeping in mind the overall cost factor of closing the loan and availing new loan.

If borrower has sufficient funds, but not enough to pre close entire loan amount, then part payment option can be considered, where a part of the loan is repaid. Such payment brings down the EMIs and the total interest paid and to be paid. This is easy, but an effective way to save on the interest outgo during the tenure of the loan.

However, Part-payment of business loan is not allowed by any of the lenders. One has to either make full payment or continue paying full term periodic EMI.

If the borrower is facing a temporary liquidity crunch, may apply to the lender for extending loan tenure so that EMI burden can come down. However, tenure extension may amount to “Debt Restructuring” as per RBI guideline. Such instance is not widely practiced in Business Loans unless there is a drastic change in external economic condition.

Generally, when a loan is sanctioned and disbursed, the loan file is kept safely with the lender as they need to preserve them and refer them until the loan is running. But in the case of Loan application is rejected, then documents submitted are destroyed. The documents once collected cannot be given back to ensure these documents are not misused. Still, there may be possibilities of misuse of the documents. The best way to protect one from any fraudulent activity is to scribe “Submitted to XYZ Bank for Loan Application” on each and every document submitted.

A fall in turn Over or Profit or both affects the eligibility prospect. However, lenders may consider based on general industry trend, recovery shown in last 3 to 6 months or appropriate reasons which justify such a fall may not be considered as risky.

A borrower having a property at a different location than the business, may also be allowed by selective lenders, provided the lender has an operation at such location.

A business loan is a collateral-free loan. However, Lenders prefer borrower having own property as having own property means the borrower has better net worth and stability. Borrowers without own property may get a lower loan as lender perceived it as  higher risk in sanctioning. Higher risk also means the loan may carry a higher rate of interest. Property in the name of close family members may also be considered for this purpose, and few lenders may insist on taking the property owner as a party to the loan structure.

ITR is the key document for every loan application. There are various schemes offered by the lender to provide loans to borrowers without Income Tax Returns. However, latest year ITR is required for a higher loan amount. It is recommended to file the returns on time to be eligible for a higher loan amount with better terms from a wide range of lenders.

Business Loan is a collateral-free loan; hence lenders are cautious and put stringent assessment procedure while sanctioning. Timely payment of existing loans instalment is one of the key risk assessments. Recent default in paying EMIs on time of the existing loan may lead to a conclusion that the borrower’s inability to pay on time or intention to repay the loan. If the EMIs are returned unpaid due to technical reason, with suitable justification, the lender may sanction the loan.

Most of the lenders look for a business track record for lending. A newly started business or startup fails to exhibit historical business performance, thereby fall short of getting funding under widely known loan products. Also, Business Loan as a product is offered to businesses established for more than 3 years. Hence, a business which is less than 3 years has fewer lenders as options and limited schemes to choose from. Lenders are started offering innovative schemes through holistic risk assessment to accommodate businesses having quality cashflow management with better future prospective.