Know More About Business Loan
As the name suggests, business loans are granted by banks and financial institutions for commencing or expansion of business operations. These loans are provided to individuals, partnership firms or even companies. But the loan amount is to be used only for business purpose and not for personal expenses. The types of business loans are professional loans, trade loans, and short-term, intermediate and long-term loans.
The loan amount and the tenure of business loan differ from bank to bank. Up to a certain limit, no security is to be given. But after certain limit, collateral security is to be provided to the bank. It must be noted that the working of business loans is similar to that of an overdraft facility. The charging of interest is done on the amount utilized and not on the loan amount.
Short-term, Intermediate and Long-term Loans
Short-term loans are issued for only one year and cover related working capital needs. Intermediate loans are for a period of one to three years and are used for new business start-up, developing inventory and purchasing equipments. Long-term loans are issued for a period of three to five years. It is mainly used by established business concerns for expanding their business activities. The loan amount can be utilized for purchase of land and buildings, and fulfilling long-term capital needs.
Professional Loans
Qualified and full-time professionals such as doctors, Chartered Accountants, Company Secretaries can ask for professional loans to the banks and financial institutions. Please note that this loan is not issued to the industrial and manufacturing units. Before deciding the loan amount, the bank considers the following aspects of the applicant: age, financial creditworthiness, repayment ability, loan tenure, and so on. The interest rate applicable depends either on the diminishing balance method or on the fixed ones. But sometimes, the bank may also take into consideration the profile of the customer for deciding interest rate. A nominal amount of processing fees is also charged by some of the financial institutions to grant professional loans.
Trade Loans
Here, three types of concerns are considered for granting trade loans:
- Sole proprietorship
- Partnership firms
- Companies
This type of loan is granted to the traders or businessmen. It is used for opening up of new business or expansion of current business. While deciding the amount of loan, different factors are to be considered of the organization. The profits earned by the company or the firm, its repayment capacity and the age of the applicant in case of sole proprietorship are taken into consideration. Generally, the tenure of the loan is five years and it has to be repaid in EMIs.
Many banks demand collateral security in case the loan amount in higher than the specified limit. The interest rate is fixed or floating.
Thus, business loans are the most commonly used and popular financing tool for the professionals as well as for companies in India. It aids in the expansion and diversification of their business tasks.
