Business Loan

What is a Business Loan?

A business loan is a loan that is provided by financial institutions such as Banks and NBFCs to a business. This loan is usually taken by MSMEs, SMEs, Self employed individuals and corporates to help in their working capital and growth needs.

Business loans can take various shapes and forms depending upon various factors. However, business loans can be divided into two main categories i.e. Unsecured loan and Secured Loan.

Unsecured and Secured Loan

Unsecured business loan as the name suggest are the loans that are unsecured in nature. Financial institutions don’t take any collateral or any other security arising out of the use of loan in case of unsecured loan. Banks usually give unsecured loans on the basis of repayment capacity of the borrower. Unsecured loans may have higher rate of interest and lower tenure to compensate for the additional risk taken by a bank.

Secured business loans are the loans that have an additional security attached with them apart from repayment capacity of the borrower. These securities are either additional collateral taken or security arising out of a business operation. Collateral required might include a constructed property, land, gold etc. Securities arising out of a business operations includes stocks, debtors, finished goods etc.

 

Use of a business loan

There are several uses of a business loan depending upon the requirement of a business entity. Main use of a business loan are –

1. Working capital – Business loans are a great help in managing working capital requirement of a firm. Working capital requirements are requirements that are needed to be met on regular basis such as payment of salaries, raw material purchase, payment to vendors etc. If working capital requirements are not met in time then business run a danger of running into a position of no cash. A timely business loan can help in this situation
2. Purchase of machinery – Business loans are a great medium to purchase the machinery for the business. A business that is a manufacturing related business require purchase of new machinery if it wants to grow itself. Business loans from a NBFC or a bank can help in this regard. As most of the small business doesn’t have adequate cash to buy a new machinery from their own bank balances.
3. New projects – If a corporate entity wants to start a new project then it can not happen without initial cash burn by the corporate. in this situation, banks and NBCs offer different types of loan to finance project. During initial phase of project when it doesn’t generate a cash, bank usually charges only interest on the loan given.
4. Improve credit history – Loan  for business is one of the best tool to improve a credit history profile for a business. Credit history usually improves by timely repayment of loans and other credit facility. A timely payment of an unsecured loan will result in a improved credit score. Though, it usually takes more than 3-6 months to reflect in credit bureau report.
5. Flexibility in usage – Banks and NBFCs don’t interfere in day to day running of a business. Unlike other investors who hold stake in business, Banks and NBFCs are usually concerned with repayment of their loan and not with how your day to day business functions
6. Freedom from market lenders – Market lenders usually charges higher rate of interest on their loan compared to a bank. Thus, a business can save large amount of money in interest by taking a loan for business from a recognized financial institution