Following are the key features of Business Loan:

• Purpose: To meet the financial requirements of the business, including the purchase of new plant and machinery, to replace the existing plant and machinery, building infrastructure, expanding the business, etc. required to take the business to a greater level. Also, working capital finance is extended to provide for the day to day operational cost of the business.
• Loan amount: The loan limit depends on the project for which the finance is required. The assessment is based on the vision of the business through the projected financial statements for years up to which the repayment is fixed, the profile of the promoters, expected cash flow from the business, and other factors. 

For projects where the loan required is above  2 Crores, the project appraisal will be done by a team of skilled persons from the Project Finance Department (PFD) of the bank/financial institution. Based on PFD, liquidity ratio, Debt Service Coverage Ratio (DSCR), Fixed Asset Ratio, and various other factors, the quantum will be decided.

• Interest: The rate of interest varies from lender to lender., depending on the loan quantum, the project for which the finance is sought, line of activity, the business sector, and the customer’s profile.
• Security: The security depends on the quantum of loan and also the business sector. 
  • Usually, for a loan up to Rs. 2 Crores to MSME Sector, no collateral security is insisted. The loan will be covered by the Credit Guarantee Scheme. 
  • Normally the primary security will be by way of hypothecation of the stocks and receivables if the finance is for working capital. 
  • Hypothecation of the assets created out of the bank finance if the loan is for capital investment. 
  • Collateral security by way of residential/commercial property will be required. 
  • The agricultural property will not be accepted unless the finance is for agricultural and allied activities.
• Repayment: The working capital finance is short-term finance provided for a period of 6 to 12 months, which will be renewed on an annual review. The repayment period for term loans ranges from 3 years to 8 years and even up to 20 years if the construction of business premises is involved.
• Processing fee: Processing fee also depends on the nature of the activity and the business sector but generally will be up to 3.5% depending on the bank/financial institution.
• Prepayment charges: Some of the lenders do not collect any prepayment charges while others charge Nil to 6% on the outstanding balance.

Business loans involve various types of charges, like documentation charges, cheque dishonour charges, repayment mode swap charges, charges for duplicate NOC, cancellation charges, and so on. Following are three main charges types that are common for each lender:

• Processing charges: Up to 3.5% of the loan amount + GST.
• Foreclosure charges: Up to 6% of the outstanding loan amount.

Delayed payment penalty: 2% onwards over & above the normal rate of interest on the overdue amount for the overdue period.

• Prepare a business charter containing the details of your business plans for the next few years.
• Be aware of the credit score of the promoters as well as the company before approaching the lender.
• Decide the quantum as knowing the right quantum of loan is also a mandatory requirement.
• Do a bit of market research to understand the various options available for Business Loans in the market.
• Shortlist the options that suit your requirement and also check for the interest rates and other associated charges for the loan.
• Look for the lender which does not have elaborate approval procedures.
• Be aware of the documents required and keep them ready before applying for the Business Loan.

It is important to be aware of the credit score of the promoters as well as the company before approaching the lender. Credit scores indicate your repayment history. If both the company and the promoters have a good credit history, it will be that much easier to get approval for a business loan.

• The eligibility check for a Business Loan depends on the following variants:

  • The credit score of the company/promoters is mandatory. Good credit score depicts the financial discipline of the company/promoters, which goes a long way in the credit decision.
  • The financial statements of the company, which consists of the balance sheet and profit & loss account of the company. Financial statements of the company for the last 3 years and projected financial statements for the next year will give a brief idea about the income generation and performance of the company.
  • The DSCR indicates the repayment capacity of the company. The ideal DSCR should be between 1 and 1.5.

• Yes. Part-payment facility after a certain lock-in period will be permitted. However, the number of times a part-payment can be made will depend on the lender. Also, part-payment charges ranging from 2% to 4% will be charged on the part-paid amount.

• Business Loans should be paid in Equated Monthly Instalments (EMIs) for which auto-debit instructions have to be given.