Business loans can be used for business expansion purposes, manage cash flow, buy equipment/machinery, hire/train staff, purchase raw materials, upgrade inventory and much more. Businesses require an adequate amount of capital to fund start-up expenses or pay for expansions. In the present scenario, most lenders do not pressurise borrowers to submit any collateral or security to avail unsecured business loan. Business loans are needed, desired and availed for various purposes. Some business loan types are given below.

• Professional Loans –are offered to only self-employed professionals like doctors, lawyers, charted accountants based on their individual credit history. These loans are offered based on personal rapport and in many cases collateral like non-agricultural land, NSC bonds, Government bonds, Bank’s term deposits etc. is required.
• Working Capital Loan – is given on some collateral and interest is charged only for the utilized amount and not the sanctioned amount but the interest is generally lower than that on overdraft. In business loans, the amount sanctioned can be utilized in a specific purpose only i.e., working of the business. In working capital loans, banks take full control of monitoring the order book, receivables, cash flow, inventory etc. The bank also has the right to deny the loan if the set parameters and expectations are defined are not met. The banks are more comfortable to provide working capital loans as they have can monitor and audit the overall financial health of the business in regularly.
• Trade Loans – are offered to sole proprietorship firms, partnership firms and private limited companies. These loans are offered in 3 variants viz. overdraft, working capital and term loan.
• Overdraft – is offered depending on the credit history, cash flows, tenure of banking relationship and the repayment history of the business or individual promoter. Usually, overdraft loans are approved based on some collateral or securities, especially bank fixed deposits. Interest is charged by the bank only on the utilized amount.
• Term Loan – is like any other loan that can be used for both personal and business purposes. Interest amount is fixed in term loans and entire loan amount is distributed for a predefined tenure in EMIs (Equated Monthly Installments). One can avail term loans either in foreign currency or in domestic currency. In India, foreign currency loans are cheaper than domestic currency loans as cost of capital deployment is cheaper outside India.

Business loans are very helpful when one is starting out or are looking for working capital to expand operations, hiring staff or buying plant & machinery etc. To grow, businesses need funding and most businesses lack enough reserves at all times for various reasons. Hence, they look to banks and financial institutions help.

A loan is a big commitment, but it also offers some tax benefits to the borrower as a business can write off the interest payments as expenses. As per the Income Tax Act, a business gets a deduction on the business loan interest paid out of profits. Interest on a business loan the amount paid by a business over and above the principal amount of the loan charged by the lender.

Deductible expenses are those that are incurred by a business for generating income. It is calculated thus.

Gross Revenue – Deductible Expenses = Taxable income

The interest on the loan is a part of these tax-deductible expenses and hence makes way for a tax exemption. Only the interest is a deductible expense and not the principal as the interest is paid out of the profits while the principal is the money owed by the business to the lending institution. The provision to write off interest payments as a business expense gives a huge relief to business owners as they are already strained by the loan and interest commitments.

Below are the documents required for Business Loans.

1. Business continuity proof
   • Last 2 years’ banks statement with cash flows
   • Salary payment for 2 years, utility bills etc.,
2. Financial documents
   • Last 3 years audited balance sheet along with financial statements
   • Last 3 years Profit and Loss statement
   • Last 3 years ITRs with computation
3. Company documents
   • Certificate of Incorporations/Registration of Partnership/Trust Deed etc.,
   • Authorized signatory list
   • Self-attested company pan card
   • Self-attested company address proof
   • MOA and AOA
   • Board Resolution
4. Company documents
   • KYC of individual promoters of directors
   • Self-attested pan card
   • Self-attested address proof
   • Photograph

The business turnover ratio measures the proficiency of a business with which it effectively collects their receivables or the credit it has extended to its customers. To be eligible for business loan, the applicant must own a business running for at least a certain number of years and must have filed Income Tax returns. The period depends on the lender. Also, good business loan turnover ratio gives a positive reflection of business growth and profitability, making it a good profile for business loan.

A CIBIL score of 750 is considered healthy to avail a business loan. The closer your score is to 900, higher are your chances of getting the loan on good terms.