Every business needs capital for expansion and smooth functioning of the enterprise. Business owners may not always have funds to invest. One of the main sources to capital is borrowing funds from the market in the form of a business loan. The main advantage of getting a business loan is that your ownership in the business is not affected.
In this article we discuss what a business loan is, the benefits of small business loans and the advantages and disadvantages of loans in business.
According to insights, 29% of business failures are due to a lack of sufficient capital. Business loans can help to raise funds.
Why are business loans important for a business?
Business loans refers to funds that businesses can avail at an interest rate from banks, non-banking financial companies (NBFCs), or other financial institutions to meet their financial requirements. The borrower repays the business loan through various methods such as EMIs, part-payment, lump-sum payments, etc.
There are different kinds of business loans, and special MSME loan schemes and business loans for women entrepreneurs offered by the government to support small businesses in their growth journeys.
Why are business loans important for a business?
One of the most widely leveraged financial products for business owners, business loans provide several benefits for businesses as there are no restrictions on the use of the loan amount. Hence, a loan can be utilised to fulfil different needs of the business.
8 reasons to take business loans:
- Working capital requirement
- Human resource
- Cash management
- Paying tax
What are the advantages of availing a business loan?
While there could be various reasons for availing a business loan, be it to raise finance for expansion or investing in real estate, business loans have several advantages especially for emerging businesses.
Listed below are the top 10 benefits of a business loan:
Business loan lenders like banks and NBFCs allow you full control over how you spend funds or how you run your business. They are simply concerned with timely repayments. (Note: In general when availing a business loan, borrowers usually submit a business plan with an overview of how the funds are to be spent)
2. Convenience and ease:
Securing a business loan is easy and straightforward as compared to looking for investors to finance your business. You just need to approach a financial house and talk out the requirements of securing finance.
3. Reasonable interest rates:
Most banks and NBFCs are driven by cutthroat competition in the market and therefore, offer reasonable interest rates on business loans. In general, there is a basic rate set by the RBI though lenders have the flexibility to adjust the rates slightly e.g., for a basic collateral-free loan of up to ₹30 Lakh, loan interest rates can vary between 12-18% (approx) depending on the lender.
4. Profits not sharable:
Contrary to an investor who would want a share of the profit your business makes, in case of a business loan, you only need to pay back the EMI to the lender, no matter how much profit you make.
5. No collateral:
In case of small-value business loans usually no collateral is asked provided you meet the eligibility criteria for small business loans. This is a viable option for small businesses who may not have assets to offer as collateral.
6. Working capital support:
A business loan helps you to improve your liquidity as it can also be used to increase your working capital. This fund can be used for daily operations, and you are saved from dipping into your emergency funds.
7. Multiple options:
You get a huge range of options to choose a business loan that is best suited for your business. Most lenders have various types of business loan schemes like business loans, term loans, machinery loans, etc.
8. Tax benefits:
Business loans also have tax benefits as the interest payable is often tax-deductible. Always check for eligibility and tax benefits before applying for a business loan.
9. Faster disbursal:
As minimal documentation is required for business loans, not much time is required for its disbursement. Hence, you do not need to stall your growth plans while awaiting a business loan. Also, in most cases, loan applications can be made online reducing time otherwise spent in manual verification.
10. Better business credit:
Availing a business loan and returning it on time improves the credibility of your business. A good track record will also help you to secure more funds at lower business loan interest rates in future.
What are the disadvantages of a business loan?
While business loans have a lot of advantages and is the most common form of securing funds for your business, there are certain disadvantages too. Here are the main disadvantages of business loan:
- Interest rates are higher as the risk is more for the lender
- Credit score is assessed before sanctioning the loan as there is often no collateral involved
- Documentation is a must and incapability to furnish paperwork prevents approval of the loan
To sum up: Why should you avail a business loan?
Business loan is one of the most common ways to raise capital for your business. A loan provides a better source of capital for a business in comparison with other financial options. Moreover, you also get the freedom to utilise the borrowed funds as per your requirement. As a businessman you should not shy away from availing loans as they can help you to grow your business. Carefully read guidelines to avail a business loan best suited for you.
In case you need assistance to decide and apply for a business loan, you can reach out to Tata nexarc business loans that offers attractive unsecured loans from leading banks and financial institutions in India to meet your MSME’s financial needs. You do not need to visit multiple banks to find the lowest interest rates, repayment and EMI options. You can also compare the rates of various lenders and find the right option for your emerging business on the Tata nexarc platform.