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Home > India > Business > Personal Finance



All about business loans

BankBazaar.com | April 07, 2009 14:16 IST

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Being an entrepreneur or even aspiring to be one is not an easy task. It might be easy to come up with an idea or even set it rolling. However, to ensure that the business idea takes off successfully or the company can grow so that there are substantial profits, there are a lot of factors that needs to be looked at -- manpower, target audience, etc.

Also, there is another factor which is very important and which most of us would have thought of even before thinking about the above mentioned factors -- capital investment. First and foremost you need to have money to start or expand your own business.

The traditional way of raising money for your business is by borrowing from family or relatives, scouting for investors who would be interested or partnering with friends who have the money to invest.

In the case of private investors, those who are convinced about your business model would be willing to provide the funds needed for your business venture.

One more option of sourcing funds is to obtain a loan against your assets, for example, a loan against property is especially useful for such purposes.

However, there are specific loans to be availed for precisely this function that are termed under the category of business or commercial loans. This is a popular category of loans offered by almost all banks in both public as well as private sector. The main aim of a commercial loan is to help traders, businessmen and professionals, start or expand their commercial activities.

These loans can be used to buy necessary equipments, recruitment of manpower, stationeries, renting office premises, expanding, modernising or improving business, etc. In fact, business loans help you cover the cost of every aspect of your business requirements.

There are two types of commercial loans:

Professional loans

Professional loans are given to self employed professionals such as doctors, chartered accountants, etc. Even though it varies from bank to bank, banks give from Rs 25,000 to Rs 25 lakh (Rs 2.5 million).

Also, there are many instances when some kind of security or collateral (mortgage of non- agricultural land, National Savings Certificates, government bonds, bank's term deposits, and assignment of life insurance policies, etc.) is required, for loan amounts exceeding Rs 15 lakh (Rs 1.5 million). These loans should be paid back in a period of five  years depending on the bank.

Documents required:

  • Complete business plan
  • Personal financial statements
  • Collateral to secure the loan (if amount exceeds Rs. 15, 00, 000)
  • Incorporation documents, proof of ownership or sale if the business was purchased
  • Tax returns and credit references

Trade loans

Trade loans are given to traders and businessmen. Present day trading involves heavy initial investment and pooling in continuous financial resources.

Banks are providing trade loans to traders / businessmen to help them set up or expand their business. Even though it varies from bank to bank, banks give from Rs. 25, 000 to Rs.35L. Even for trade loans, some banks ask security or collateral.

Some banks suggest investing a certain minimum margin of profits from business, as fixed deposits to assure security for the loan taken. Other criteria taken into consideration for the amount lent towards these business loans include current financial standing, repayment capacity, duration of the loan period etc. These loans have to be paid back in a period of five years.

Documents required:

  • Proof of business existence for at least two years.
  • Financial Statements including Balance Sheet and P/L statement for the last three years.
  • Proof of residence.
  • Proof of place of business.

The interest rates applicable for both these types of loan range anywhere between 8 per cent and 15 per cent.

Generally you are expected to repay the amount in a maximum period of 5 years and some banks provide you with options in the choice of periodicity of repayment. For example, you could have a choice of monthly, quarterly, half-yearly repayment periods from the commencement of the loan.

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