Business Loan: Meaning, Types and How to Apply?

Starting a new business can be an exciting prospect. You can be your own boss, set your own business ethos, and make your own decisions to take the business to the level you want. But like any other thing in life, starting a business comes with its own set of challenges. The biggest one is having enough capital to start the business and then a constant flow of funds to keep the business running.

 

Sometimes, arranging enough funds from your own savings or other sources can be difficult. This is when you may feel the need to apply for a business loan. If you are unsure what a business loan is, this guide is just for you. Read on!

 

What is a business loan?

 

The simplest business loan definition is that it is a credit option that is specifically meant to cater to the financial needs of business owners. Irrespective of the type of business you own or want to start, you can apply for a business loan anytime from any bank, an NBFC (non-banking financial company) or a private lender.

 

Once you get the approval for your loan, you can use the funds to cover any business-related expenses as you deem fit, like –

 

• Paying employees’ salaries
• Buying new machinery to improve production efficiency
• Stock or purchase new inventory
• Expand your business operations
• Open a new branch or buy a bigger office space

 

Now that you know the meaning of a business loan, let's examine other important details, such as types of business loans and steps to apply.

 

Types of Business Loan

 

Every business is different and, therefore, has different capital needs. And so, to meet the financial requirements of the business owners, the lenders in India offer different kinds of loans. You can choose the right type of business loan based on your specific purpose. Here are some of the common types of business loans.

 

 

 

Term loans

 

A term loan is one of the most common types of business loans in India. With this loan, you can borrow a specific amount of money as per your eligibility for a pre-determined fixed period and at a fixed interest rate.

 

Generally, term loans for business are available for your immediate and long-term business expenses requirements; the tenure can range from 2 to 5 years or more, based on the lender’s policies.

When you apply for a term loan for business, the lender may require you to provide some collateral against the amount you borrow. The good thing about a term loan for a business is that the interest rate is quite low. We at Udyog Plus offer loans at interest rates starting from 8% per annum.

 

Overdraft

 

Overdraft is a short-term business loan that allows you to withdraw funds more than the balance available in your current bank account. Many banks and other financial institutions offer overdraft facilities to business owners. But to avail of this credit, you must provide collateral, i.e., pledge an asset as a security cover against the amount you borrow.

 

Also, with an overdraft loan, you can borrow up to a predetermined credit limit set by the lender. The good thing about this kind of business loan is that the lenders levy interest only on the amount utilised from the available limit, and the lenders have no restriction on how you use the funds.

 

Getting an overdraft loan is a great way to overcome cash flow fluctuations and immediate cash requirements for the business.

 

Letter of Credit

 

A letter of credit or LC is a financial instrument that financial institutions and banks issue to business owners who carry out international trade transactions. In this arrangement, the lender provides a guarantee of payment to the supplier or the export on your behalf, the business owner.

 

A letter of credit is pivotal for international trading purposes as it reduces the risk for both the parties involved, and you can ensure that the transaction is done smoothly.

 

Cash Credit

 

This is another popular way of getting credit to raise funds for working capital among business owners in India. Just like overdraft, in this arrangement, you can withdraw more funds than you have in your account up to a predetermined limit assigned by the lender.

 

The lender calculates the withdrawal limit based on the working capital you have currently in your business and your financial projections for the future. The most significant benefit of availing a cash credit is that the lender levies interest only on the amount used, giving you the flexibility and easy access to cash required to keep your everyday business operations running.

 

Startup Loan

 

As the name says it all, this kind of loan is specially catered to help startup business owners meet their financial needs. Under this loan, you can borrow funds to bring your business idea to life, purchase new machinery/equipment for your startup, for marketing purposes and other expenses involved in growing your new business.

 

How to Apply for Business Loan?

 

The business loan application and approval process may vary from one lender to another based on their internal policies. So, it is advisable that you do your research well about the different lenders and choose one that has a simple application process, easy documentation, and an affordable interest rate.

 

One such lender in India is Udyog Plus. It is part of Aditya Birla Finance Limited, which offers a wide range of financial services for business owners and enterprises in India, including loans. Applying for a business loan with Udyog Plus is simple, and you can be assured of having an uncomplicated borrowing experience.

 

Firstly, the entire process, from application to disbursement, is digital. This means you can apply for the loan from the comfort of your home or office and at any time you want, with just a click of a few buttons. The application involves four simple steps –

 

Step 1 – Fill in the basic details

Visit the Udyog Plus website and click on the instant business loan option under the Finance Your Business tab. Enter the basic details as required and click on the submit button.

 

Step 2 – Comply with KYC process

You will now be redirected to a new page, where you must complete the KYC or Know Your Customer process and submit the necessary documents. The required documents are basic, like identity proof, address proof of both business entity and residence, income details, proof of business ownership, etc.

 

Step 3 – Signing the Agreement

After you submit the required document, next step is to register eNACH  and give your digital signature for the loan agreements. At this point, it is critical that you read the loan terms and conditions carefully before you sign it. 

 

Step 4 – Disbursement

After you comply the above three steps, the lender will review you application, and if you meet all the eligibility and all the documents are clear, your application will be approved, and you will get the disbursement on the same day.

 

Final Word

 

A business loan is a big boon for all business owners; it allows them to get the funds they need to grow their business. If you need funds for your business, you can apply for a loan with Udyog Plus, a leading financial institution in India that offers customised and comprehensive business loan solutions for all kinds of business owners.