Complete Guide to a Business Loan and Components of the Loan Agreement

A business loan is a type of financing one can avail to fulfill the need of funds for business purpose. If you require funding to buy machinery, expand existing business,boost production or likewise, you can apply for a business loan online with top banks and NBFCs. You do not have to pledge any asset for such kind of loan. The loan can be repaid over a specific period of time, usually between 1 year and 5 years.

Features of a Business Loan in India

Given below are some of the business loan features:

• The loan is unsecured. You do not have to submit collateral or security.
• Loan amount ranges between Rs.1 lakh and Rs. 1 crore.
• The loan amount cannot be utilized for any other purpose than what it is taken for i.e. business.
• Flexible repayment options are available, including payment of only interest through the tenure and the principal component after the tenure ends.
• Not only banks but non-banking financial companies also offer finance to businesses.

Types of Business Loans

Below given are business loan types.

1. Term Loan: The borrower has to repay the amount on EMI basis. He/she has the facility to prepay the loan.
2. Flexi Loan: The monthly repayment may just comprise of the interest component.The borrower can withdraw money when required. Principal component is repaid after the tenure ends.
3. SME Loans and MSME Loans: These loans are provided to small medium enterprises and medium sized enterprises. Several government loan schemes are available to encourage such small and medium sized companies to meet the fund requirements.
4. Equipment Financing: This type of funding is primarily to purchase or upgrade of only necessary equipment and machinery required for the business.
5. Invoice Financing: Many a times due to delay in payment by the client, the company may not receive funds in time for its needs. In such scenarios, the organization can apply for invoice financing option. The lender will provide loan based on the amount in the invoice.

Eligibility Requirements

The eligibility requirements for a loan for business are mentioned below:

• The business should have a vintage of minimum 3 years.
• You should be between 25 years and 55 years old.
• The company must have its Income Tax returns filed for a minimum of 1 to 3 years.
• The organization must have its last year’s turnover audited by a CA.
• Financial statements, documents of business registration and ownership etc.

Business Loan Interest Rate

The rate of interest on business loan will differ from one financial institution to other.The interest rate is often influenced by the company’s financial position, loan amount, tenure, company credit score, and other factors. You can get business loan interest rate as low as 13%.

Business Loan EMI Calculator

Business Loan EMI is equated monthly installment. It is the repayment towards business loan. EMI comprises of a part of the interest levied on the loan and a part of the principal amount. It usually calculated based on three main criteria: loan tenure, loan amount, and the interest rate.

Documents Required for Business Loan

You will need the following documents to apply for a business loan.

• Identity proof documents such as Aadhar card, Voter ID card, PAN Card etc.
• Bank account statements and practice certificate.
• Ownership proof of possession that are used for the business.
• Income tax statements of the last 3 years.
• KYC documents of the co-applicant as well as yours.
• Proof of residence.
• Recent passport size photographs.

Components of a Business Loan Agreement

The business loan agreement is an agreement/contract between the lender/financial institution and the borrower/business. The agreement represents the terms and conditions, rules, and other aspects about the loan deal and a certification of promised loan amount and the repayment terms. It is advisable that you read the loan agreement carefully before signing the same.

Here, we list out the basic components of the agreement.

1. Effective Date: It is the date of signing the loan agreement and the date when the amount is disbursed.
2. Parties Involved: The two parties involved are described in the agreement. If there is a co-signer then he/she is also described.
3. Definitions: Listing of key terms and its definitions.
4. Promissory Note or Mortgage: The promissory note could be secured by a business asset, or it may be unsecured. Promissory note is primarily the promise to pay. A mortgage is considered as a specific type of promissory note against a property (building or land). If the loan is secured, the security is detailed out.
5. Terms and Conditions: The most important part of the agreement, terms and conditions will list out the loan amount, repayment tenure (usually stated in months), payment schedule, penalties for non-payment, statement that the loan may be prepaid,interest rate expressed in annual percentage rate and if the rate is floating or fixed, defaults and acceleration clause wherein both parties make promises,and if one party fails to fulfill the promise, then the agreement is in default.A fine and penalty is mentioned if an agreement is defaulted.
6. Representation of the Borrower: If you are the borrower, you will be asked to confirm certain statements. The statements can include such as assurance that the business is legally able to perform in the country, the tax returns are filed and all taxes are paid, no liens exist, no lawsuits exist against the business, all details you provided are true and accurate, etc.
7. Governing Law: As business loans are subject to country laws or state laws, the agreement will include a sentence mentioning which law governs it.
8. Covenants: A covenant is promise made by both the parties. Some of the covenants that could be part of the business loan agreement are: proof of insurance on security you are pledging, life insurance on you and with lender as the beneficiary, understatement of fees and taxes paid on the asset,property taxes, licenses, mentioning that the business may not take additional debt and the management shall not change, periodic financial statements etc.

You may require a business loan for your company or start-up for a variety of reasons. It is best to understand the features of the loan you take, along with the interest rate charged and other necessary, before you apply for the loan. Once you decide on the loan and it is approved, you must go through the loan agreement thoroughly before signing it.