Business Loan 2
What is a Business Loan?
Business loans are unsecured financial assistance provided by banks and NBFCs. They are offered without collateral and aimed to support the urgent needs of a business.
Who can avail?
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
What are the minimum and maximum age required for a borrower?
The age group for availing credit facility is in the range of 21-65 years. The maximum age of 65 should be at the time of maturity of the loan. Lenders do insist on taking insurance cover in the form of loan shield, and the premium starts increasing with an increase in age. Therefore, the younger generation enjoys a better price as well as terms and conditions while availing a loan as compared to the older generation. The risk associated with higher age factor can be mitigated by adding one or more younger generation individuals as co-borrower or guarantor to the loan structure.
In how many days the loan can be disbursed, in short, what is the TAT of disbursement?
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.
What are the loan tenure options?
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.
What is the maximum amount one can borrow?
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.
What are the repayment options are allowed by the lenders?
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.
Eligibility, Rate of Interest and Charges
How is the eligibility calculated?
The eligibility of a BL depends upon various factors, including the following important ones:
- Income of applicant
- The credit score of an applicant
- Income and creditworthiness of the co-borrower or guarantor
- Other non-financial information
How old borrower’s business should be to be eligible for Business 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.
Does a loan taken in recent months affect borrower’s eligibility?
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.
What is the standard Rate of Interest?
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.
What are the charges involved in taking a loan other than the rate of interest?
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.
If borrower is part of multiple business, can he borrow based on cumulative business Income?
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.
Does having existing loans help the borrower in getting a higher loan amount ?
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.
Purpose, Usage, Benefits, Disadvantages
What is the purpose for which loan can be used? Is there any restriction on the use of the fund
Business loans are collateral-free loans and come without end-use monitoring. The usage of the fund too not mandated, except that such fund cannot be utilized for investing in the stock market or speculation transactions. Businesses borrow Business loan for various reasons:
- Business Expansion through the acquisition of capital assets
- Margin money for large loans
- Acquisition of land for future business use
- Technology upgrade
- Managing seasonal surge in business
- Deposit for a new line of business
What are the benefits?
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.
What are the benefits available under Income Tax?
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.
What are the disadvantages? Challenges
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.
Can borrower avail Loan in a personal capacity?
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.
Is there any restriction on the end use of the loan?
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.
Products & Schemes
What are the products or schemes available?
Business Loan has come a long way since its Introduction. Lenders have evolved in understanding the risk. Based on various other financial & non-financial aspects from where lender derives comfort in taking the exposure, they have designed schemes. Lenders calculate eligibility under several schemes; a borrower should apply under the most suitable scheme to be most benefited. aagey.com, with its rich experience and extensive studies has developed proprietary algorithm which analyses 1,000+ schemes offered by 75+ lenders to bring the best fitment possible. Few of the schemes are:
- Income to Obligation method
- Based on the transaction and average balances maintained in the business account
- The perceived margin of the industry to which the borrower belongs
- Based on monthly GST returns files
- Rental income received
Track record of repayment of existing or earlier loans from other Lenders.
What are the types of loans available under Business Loan?
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)
What is Top Up Loan and what are the eligibilities?
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.
Can an NRI or OCI take a business loan?
Neither NRI nor OCI are not eligible to borrow Business Loan.
In case of partnership and private ltd company, whether funding can be done in partner’s and director’s name?
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.
What is Foreclosure / Pre-Closure / Pre-payment of loan?
Foreclosure or Pre-payment is the process when one repays the loan before the loan tenure ends. Foreclosure of loan comes with penal charges depending upon the number of EMIs paid. Shorter the EMI servicing period, higher the penal charges. Foreclosure charges range between 2% to 5% of the outstanding amount.
Minimum EMI servicing period to be eligible for foreclosure is 6M to 12M depending upon the policies of each lender.
Does borrower need to close all or part of his/her existing loans to avail new loan?
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.
What is part-payment?
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.
Can borrower avail tenure extension if required?
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.
How safe are borrower’s documents with Lender?
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.
If there is reduction in turn over compare to previous year, will the borrower still be eligible for loan?
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.
Can the borrower get his loan sanction if he has property in a different city than his business?
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.
Being collateral-free loan, why does Lender ask borrower’s own house proof?
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.
Will the credit score of borrower be affected if they apply for Business Loan?
One of the key factors which determines CIBIL score is, Number of recent enquiries and success of getting the loan disbursed. Applying for a loan creates a hard enquiry, and if there is non-disbursal, it means Lenders find the profile of borrower risky to sanction a loan. This certainly adversely affects the credit score. aagey.com, with its rich and extensive studies and experience has developed proprietary algorithm which helps to find the right product and right Lender with certainty so that the credit score is not affected negatively.
If borrower has not filled previous year’s ITR, will he be eligible?
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.
If Repayment track of borrower shows there are unpaid EMIs, will borrower be eligible for Loan?
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.
Can a startup be eligible to get Business 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.