A Beginner’s Guide to Loans for Business Growth

A business loan can help borrowers achieve their goals without disrupting their cash flow. Borrowers can avail the loan to purchase additional inventory and equipment necessary for the consistent operations of their businesses. The loan also supports business expansion by providing capital to fund new projects and technology, or through the purchase of commercial real estate properties. With the loan, borrowers can have profitable income streams and strengthen their investment strategies.

The Types of a Business Loan

A business loan can be secured or unsecured depending on the terms of a lender and the business profile of a borrower. While a secured business loan requires some assets as collateral to back up the funds, an unsecured business loan does not have any such requirements. These financial solutions can be further classified into the followings:

1) Working Capital Solutions

Working capital solutions help a borrower fulfil the daily operational costs, including utilities, accounts payables, salaries, etc.

2) Term Loans

They are usually offered as a one-time payment of large sums of money. Term loans generally require borrowers to reimburse the loan amount in the form of regular installments over a specified time period.

3) Equipment Financing

This financial solution helps a borrower acquire new equipment like drills, road rollers, scaffoldings, and cranes to accelerate the business operations. With equipment financing, borrowers can also make improvements in the existing machinery to boost productivity.

4) Invoice Financing

It enables borrowers to avail funds against the due amounts from the customers and address the cash flow gaps in business operations. This helps them manufacture and dispatch products on time.

5) Letter of Credit

It ensures that the borrower obtains the promised payment during an international trade. This secures payment for the sellers.

6) Overdraft Facility

This allows a borrower to request for additional monetary support even if he has little to no money left in the bank account.

7) Loans under Government Schemes

The government has introduced several initiatives that help borrowers support their business milestones. Some of the popular initiatives are MUDRA, Standup India, and CGTMSE schemes.

8) Merchant Cash Advance

With this facility, borrowers can pay a lump sum of money to their suppliers for obtaining materials on time.

Who is Eligible for a Business Loan?

It is essential to meet the following requirements before applying for a business loan:

• Citizenship: The borrower must be a citizen of India.
• Age: Borrowers over the age of twenty-one can apply for business loans.
• Turnover: Exhibiting good turnover helps a borrower access the loan without much hassle. The minimum turnover varies from one lender to another. However, it must align with the loan amount.
• Credit Score: A credit score is a three-digit number that rates an individual's creditworthiness and ability to obtain a loan, mortgage, or credit card. The three main credit bureaus are Equifax, Experian, and TransUnion CIBIL. Demonstrating a good credit score is crucial
• Business Vintage: Businesses of over two years old are preferred to avail the funds.
• Business Type: The business must be a sole proprietorship, partnership firm, private limited company, public limited company, or limited liability partnership (LLP).

Required Documentation

A lender may ask for the following documents:

• Proof of Identity: Borrowers have to produce proof of identity documents like Aadhaar card, PAN card, or other KYC documents.
• Proof of Ownership: A borrower must demonstrate his ownership over the company with necessary business registration certificates and other legal documents like incorporation certificates or business licenses.
• Business Plan: Drafting a detailed business plan highlighting the scope of the company and the purpose of availing the funds, along with the repayment strategies, exhibits the trustworthiness of the borrower.
• Financial Proof: Borrowers may have to submit audited balance sheets, tax returns, or income statements to demonstrate stable revenue.
• Ownership of Assets Proof: For a secured business loan, a borrower must submit documents verifying ownership over assets that will be used as collateral to back up the funds. These documents often include title deeds and property tax receipts.
• Performance Reports: Performance reports like profit margins, revenue data, and market shares highlight the productivity of the borrower’s company. Organizing past reports helps the borrower establish trust with the lender.

Getting familiar with the fundamentals of business loans helps a borrower make thoughtful decisions. Such financial solutions help borrowers fund their business needs and get ahead in the competitive market. By organizing necessary and updated documents during the loan application process, borrowers can avail the funds with minimal delays.

At Arka, we offer tailored business loans to help borrowers optimize their business operations and finance the unforeseen costs associated with them. Our customized lending solutions can be used to cover working capital needs or acquire commercial properties. Our financial solutions act as monetary cushions that help borrowers fulfil their goals at favourable interest rates and repayment terms.