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An Overview of Business Loan: Eligibility, Essential Documents & Factors Affecting Interest Rate

Submitted by admin on February 3rd, 2024

Kolkata, February 2, 2024: In India, private and public sector banks provide business loans to eligible borrowers. These institutions charge interest rate on the loaned amount as soon as EMI (Equated Monthly Installments) starts. Businesses with a good credit score and an impressive balance sheet have a better chance of qualifying for business loans. However, they must produce required documents and undergo verification process. Only after the authority is satisfied, loan is granted to the applicant.

It is important to keep in mind that business loan interest rate is not uniform across all the Indian banks. The rate varies from one bank to another and also depends on the type of loan one applies for.

There are different types of business loans. In India, the most popular types of business loans are:

Unsecured Business Term Loan: This type of loan involves a large sum of money and is repaid as EMI with additional interest for a particular period of time.

Business Overdrafts: Banks have the right to approve overdrive facility for a business and also set a maximum loan limit for it. The facility will allow the business enterprise to withdraw any time. The big difference is absence of fix patterns for repayment, given that interest is repaid periodically.

Cash Credit:It is kind of short-term loan. The loan tenure is usually up to 12 months. Interest is charged on the withdrawn amount and not the primary amount. This is why, cash credit is popular among businesses.

Business Loan Against Property: It is a kind of secured loan that requires businesses to use their business property or assets as collateral to take out loan.

MSME Gold Loan: Similar to loans approved against property, businesses can take out gold loans (typically up to 75% LTV) against the current value of gold.

How to Qualify for Business Loan

• All small, micro, medium-size enterprises, trusts, companies and societies can apply for business loan.
• The applicant must have been running business for 3 years.
• The business turnover must be 2.5 lakh or more (subject to bank’s policy)
• The applicant must produce a certificate of the latest ITR (Income Tax Return) audited and certified by a chartered account
• Computed business income, balance sheet mentioning account on profit and loss for at least a couple of years
• The borrower must be between 21 and 60/65 years at the time when loan matures

Documents Required for Business Loan Application

Two types of documents are required to apply for business loan – Personal Documents and Business Documents.

Personal Documents: Aadhaar card, Voter ID card, PAN card, Driving License, Passport (For proof of your identity and address)

Bank statement of minimum six months, latest Income Tax Returns, computation of balance sheet mentioning account on profit and loss for minimum two years (For proof of your financial statement)

Business Documents: GST/ITR return, sales tax certificate, trade license (For proof of business continuation)

Certified copy of partnership deed or certificate of sole proprietorship (other documents as per your business type)

Which Factors Affect Interest Rates on Business Loans

A number of factors determine the interest rate on your business loans. These factors include your personal credit score, commercial credit score, type of business loan (secured or unsecured), loan amount and repayment time, fixed or floating interest rate, current health of industry and market speculations.