Business Loan: Rules, Terms And Conditions You Should Be Aware

Almost every small-scale and medium-scale business struggles with managing and getting adequate capital. Getting a Business Loan can be the best solution to this problem. You can meet all your fund requirements with a Business Loan. Utilising these funds properly will allow you to run your venture smoothly. Different financial institutions will provide you with Business Loan that differ from each other based on associated terms and conditions. Read on to know in detail about Business Loan terms and conditions.

Understanding Business Loan Terms and Conditions

Understanding all the terms and conditions before taking a Business Loan is vital for avoiding any misunderstandings. Thus, you should consider the factors mentioned below:

Interest Rate

Interest rates are of two types, variable and fixed. Taking loans with fixed interest rates ensures that your monthly instalments for repaying the loan are fixed. Getting Business Loan with variable interest rates could be difficult to manage as EMIs could increase if the rate increases.

Amortisation

This helps borrowers to understand how their loan payments are distributed. Payments made in the early stage allow banks to get the interest whereas later EMIs are more focused on recovering the principal amount. Longer loan repayment duration has low EMIs but the overall interest increases, thus choose the tenure that suits you the best.

Collateral

Taking a loan against a collateral will help you get a secured Business Loan. These provide you with more suitable Business Loan terms and conditions. However, in case of a default in repayment, the collateral will be seized.

Also Read: Top 5 Differences between Fixed Capital and Working Capital Loans in Business

Why are Business Loan Terms and Conditions Important?

Business Loan are offered by different financial institutions to promote entrepreneurs and new ventures. However, you need to understand Business Loan terms and conditions as it enables you to find the best options. With a proper understanding of Business Loan policy, you can find a loan that suits your business the most.

Types of Business Loans in India 

Businesses take out working capital loans for a variety of reasons. It can be for day-to-day operations, expanding the company or purchasing raw materials and stocks. Different types of Business Loans have been listed below.   

• Short-term loans, such as capital loans, often have a one-year payback period.
• collateral-free loans or unsecured loans don't need the borrower to mortgage anything as security for the loan. The interest rate is slightly higher than long-term or general Business Loans.  
• Entrepreneurs can use a letter of credit for import and export purposes. Banks give a payment guarantee to businesses dealing outside India.  
• Government assistance via public sector banks, NBFCs, RRBs, PMMY, CGTMSE, Standup India, Startup India, and PMRY.

Business Loan Terms You Should Know

There are some major terms that you should know before taking a Business Loan. These terms are as follows:

Security Cover Clause 

The clause defining the collateral or personal guarantee against the loan is the security cover clause. It allows financial institutions to seize the asset kept by the borrower if the loan is defaulted. The bank can demand additional security when the value of the current security falls due to market fluctuation. You can take a loan without pledging any collateral only on unsecured loans.

Repayment Clause

This is the most important clause of the loan agreement and determines the loan period. On-demand and fixed-term are the two types of repayment options available. On-demand needs you to always keep a sum of money for repayment, as the bank can demand it at any time. This makes managing business expenditures very difficult. Selecting a repayment clause with a set duration is the ideal option for businesses. 

Default Clause

Generally, non-repayment of a loan to a bank is considered a default. The term default may differ from bank to bank; hence, it is important to clarify the exact definition. A lender can declare default in case of the borrower's involvement in a criminal or civil case or borrower's death.

Interest Rate Fluctuation Clause

A lender might impose two different types of interest rates—fixed and variable on your loan agreement. Regardless of the market condition, you must pay a fixed interest rate on a fixed interest rate agreement. On the other hand, if you agree to a variable interest agreement, you have to pay an interest rate based on the market condition. As an applicant, you should carefully negotiate an interest rate type that suits your loan requirements.

Business Loan at a Low-interest Rate

Convincing a financial institution about the ability to repay the loan on time is difficult. It's different from asking for money from a friend. The following are some suggestions that help secure a Business Loan at low-interest rates.

Cash Flow and Repayment History

The lender checks the business credit profile whenever anyone applies for a Business Loan. They always prefer to offer loans to businesses with sufficient cash flows and good repayment history.

Your Intent

The lender always analyzes the requirement of a Business Loan. Business loans are divided into different categories. You need to mention the category to make the loan application procedure transparent. For instance, when you need a loan to buy office equipment, you must apply for equipment loans. Specifying the reason makes the application process faster.

Healthy Credit Score

A good credit score is one of the most important factors considered by lenders when approving an unsecured Business Loan. A Business Loan at a low-interest interest rate must have a credit score of 700 or above. When you are looking for a revenue-based loan, you can get a loan only with a good credit score.

Financial Statement

Before applying for a Business Loan, keep the company's financial records updated. The lender reviews the business financial statements and records to determine creditworthiness. It makes it easier for you to get a quick loan at a lower interest rate.

Check Your Loan Amount Eligibility

Be sure to check your loan eligibility before applying for a Business Loan. When the loan amount exceeds your eligibility, you do not get the desired amount and deal with financial difficulties. So, do a proper analysis before filing a loan application. 

Also Read: The Ultimate Guide on Business Asset Loans in India

How to Get a Business Loan?

You easily apply for a Business Loan online, just follow the below steps:

• Step 1: Click on the ‘Apply Now’ button.
• Step 2: Fill in your details like name, business name, type of business, PAN number, etc.
• Step 3: Upload the necessary documents and submit your application.

To Conclude 

Business Loans may typically be obtained at terms and interest rates that are both reasonable and enticing. Comparisons can be made between many leading private and public sector banks, non-banking financial institutions (NBFCs), regional rural banks (RRBs), small finance banks (SFBs), and a large number of other banking and financial institutions to locate the best deal on a Business Loan. Pick a Business Loan after careful research and take a loan only if it suits your business needs.  

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply