Meaning & Types of Business Loans

What is loan?

As you know that loan means lending of money from one individual, organization or entity to another individual, organization or entity. A loan is a debt, provided by an entity to another entity at an interest. In a loan, the Borrower initially receives or borrows an amount of money, called the Principal, from the Lender. The borrower repays the principal amount to the lender with / without interest within a specified time.

Types of loans

i. Secured loan
ii. Unsecured loan
iii. Demand
iv. Subsidized
v. Concessional

Generally most of the people takes Secured or Unsecured loans from bank or other entity.

Secured loan: A Secured loan is a loan granted against any asset. Mortgage loan is a very common type of secured loan.

Following are some examples of secured loans:

i. Home loan
ii. Car loan (Car loan may be direct, where a bank gives loan directly to the consumer or indirect, where a car dealership acts as an intermediary between bank or financial institution or consumer)

Unsecured loan: Unsecured loans are monetary loans that are not secured against borrower's assets.

Some common unsecured loans are:

i. Business Loan
ii. Personal loan
iii. Credit card loan
iv. Bank overdraft
v. Corporate bonds
vi. Education loan
vii. LIC loan

Types of Common Securities for Loan:

If the Borrower defaults, then the Lender has a right to sell the Security and adjust it towards the due (i.e. Principle and Interest)

Requirements to grant Loan: Different banks or institutes have different rules for loan approval, in fact necessary documents also varies with type of loan and banks.

But some documents are common such as,

i. KYC documents such as Aadhaar card, PAN card etc
ii. Passport size photographs
iii. Salary slips & Form 16 in case of Salaried person
iv. IT acknowledgement, Profit & Loss A/c, Balance sheet in case of Businessman.
v. In case of Term loan, Projected Balance Sheets are required for terms within which loan will be repaid.

If you want to get loan from a Bank, then may go to the Branch Manager of the Bank before gathering all the document, at least a first interaction will be done. Also you will get some information about important document and other requisites. A good relationship with bank will help you to get loan more easily from bank.

Business Loan: You may take Business loan by two ways generally, Cash Credit Loan or Term Loan

Important documents for Business Loan:

i. KYC documents such as Aadhaar card, PAN card (in case of Partnership firm, Partnership deed, KYC documents of partners or in case of Company, MOA, AOA is also required)
ii. Trade License
iii. Current account
iv. Last 3 year Financial statement such as Balance sheet and Profit & Loss A/c ( If you want to take Loan more than 10 Lakhs, then Audited balance sheet is preferable) & I.T. Acknowledgement.

If you want to get business loan from bank more easily, don't file nil I.T. return, at least pay some income tax

Cash Credit Loan: Cash Credit loan is also known as working capital loan.
Working capital = Current assets - Current liabilities

Cash credit loan is a short term loan given by bank on the hypothecation of stock.

Cash credit A/c is different from Overdraft A/c. You may withdraw money from OD A/c and may use it in personal purpose. But Cash credit loan is given only for business purpose, you cannot withdraw money to use it in personal purpose. Cash credit a/c is different from current a/c. you need to open cash credit a/c separately to take cash credit loan.

For example: Suppose you have a business and you have Raw materials, Building, Inventories. It means you have stock in your business and need 2-3 months to sell the stock. But you haven't enough Cash in your hand to pay the salaries to the staffs or other expenses of business. Then the bank may give you cash credit loan on the hypothecation of stock. The CC limit is not fixed, it increases or decreases with your working capital.

Term loan

If you want to purchase any Plant or Machinery, you need to submit quotation of that plant or machinery to the bank. If you want to construct your business place or if you are doing small business and want to make large your business, you need to submit estimated expenses by an approved valuer to the bank.

Projected Balance Sheets are required for terms within which loan will be repaid. You need to repay your Term loan amount by monthly EMI within 5-7 years.

Bank Overdraft A/c V. Cash Credit A/c

Sometimes people thinks Overdraft and Cash Credit are same. But this is not true.

Let it explain with an example,

Overdraft A/c

Suppose you have a current account in bank and have 100,000/- closing balance. Suppose for last 2-3 years you maintains average quarter balance Rs. 100,000/- in that account also you maintains good relationship with bank. Then bank may give you Rs. 40,000/- (suppose) overdraft facility. It means, if you need Rs.130,000/- but you haven't enough balance in bank, you may withdraw Rs. 130,000/- from the bank as the bank given you overdraft limit of Rs. (100,000/- + 40,000/- = 140,000/-). The limit of overdraft facility depends on bank and the OD limit is generally fixed until you apply to the bank for increase OD limit.

Cash Credit Loan: Cash credit a/c is different from Overdraft a/c. Let it explain with a Comparison chart.