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Business loans are important for the Indian economy to run as new start-ups and businesses require money to start their own business or pre-existing business smoothly. Getting the right type of finance at the right time is the key to making the business successful. The businesses have different financial needs such as trade finance, working capital, resolving credits with the bank, letter of credit, bank guarantees and many more. One popular way entrepreneurs think to get business loans in India is through banks and NBFC. Additionally, the Government of India has also introduced many government schemes for providing loans to the MSMEs, startups, etc. However, these schemes are also implemented by the banks and NBFCs.

Business loan rules and regulations

Anyone in India can apply for a business loan, they just need to meet certain basic criteria mentioned below. If the person who wants a business loan meets all the eligibility criteria then they have to look for documentation to complete the application process. For convenience, the below table will help you understand the most common eligibility criteria and documentation requirements by lenders:

Eligibility criteria Documents
A person who wants business loans should be Indian by their nationality.

The minimum age required to get a loan in India is 18 years of age.

The business should be profitable at least for a year.

The owner of the business should have experience for at least one year in the field of work.

The CIBIL score should be more than 750.

A person who is applying for a business loan must have the last three years of income tax return (ITRs). (Exception: However, you may also apply for business loans even if you have no income proof.)

There should be a proposal of the business and its financial forecasting.

Letter of request for the business loan.

Pan card

Proof of business ownership.

KYC documents

Bank statement of promoters.

Partnership agreement if there is any.

Promoters ITRs of the last three years.

Certificate of incorporation.

Service tax registration if applicable

Promoter’s liabilities and asset statement

Business loan clauses

Loan clauses for businesses can impact the ability for companies to secure finance. Terms including prepayment penalties, claused guarantees, and covenants may be included in the contract. It is vital for companies to review these clauses before taking on loans to ensure they understand the risks and obligations they are agreeing to. Lenders may also include clauses that permit them to call in the loan or accelerate payments if certain events occur, such as a significant drop in the borrower’s business operations or revenue. Therefore, it is important for businesses to negotiate and fully comprehend loan clauses before entering into agreements with lenders.

Several key clauses typically accompany business loans in India to govern the loan agreement’s terms and conditions. Some common clauses include:

  1. Security cover clause: The security cover clause for a loan must specify the collateral or personal guarantee.Banks may ask for collateral, which is then described in the security cover clause, and can be seized if necessary. Additionally, banks may request more collateral to secure the loan if the current collateral value falls due to market volatility.
  2. Repayment clause: Period of borrowing is determined by the repayment clause which provides choices between fixed-term repayments and on-demand repayments that necessitate keeping funds available for immediate repayment. However, a fixed-term option has a predetermined duration.
  3. Default clause: Among banks, what specifically constitutes a default can differ, but typically non-payment is the trigger. Circumstances like legal entanglements or the borrower’s passing may also prompt a lender to declare a default.
  4. Interest rate fluctuation clause: The application of interest rate to a business loan can be either fixed or variable, as per the interest rate fluctuation clause. A fixed rate won’t change no matter what happens in the market, whereas a variable rate will fluctuate based on it.

Business loan default consequences: Charges and recovery

Financial penalties and recovery procedures has been focused on the dire repercussions that can arise from a business loan default. It can be observed that there could be fines, higher interest rates, with harm to one’s credit report by not repaying a business loan.

Moreover, it can be considered that assets as well as stability of the borrower may be effects by legal actions taken by lenders by including banks, NBFCs, etc., by recovering recover unpaid loans. After that, legal action, collateral auctions, as well as asset seizures are possible outcomes. Therefore, it can be observed that these consequences, borrowers should prioritise based on the loan payments on time.

Here are some a list of few rules you can follow before applying for a business loan

  • Nationality and age: It can be ensuring Indian nationality as well as minimum age of 18.
  • Profitability: It can be demonstrating at least 1 year of business profitability.
  • Experience: it can be focused on the minimum with the one-year experience in the relevant field.
  • CIBIL score: It can be maintain a CIBIL score exceeding 750.
  • Documentation: It can be gathered necessary documents, by including income tax returns, PAN card, business proposals, proof of ownership, bank statements, KYC documents, partnership agreements, as well as incorporation certificates. Thus, these rules enhance eligibility and expedite the loan application process.

Types of business loan

There are various types of loans taken by businesses and they may include loans against property for SMEs, term loans, start-up loans, working capital loans, equipment loans, business loans for women, business overdrafts, business credit cards and many more. Here are the top three types of business loans available for entrepreneurs in India.

Startup loans– In India startup businesses are increasing and almost every start-up requires a loan to run the business. Loan institutions provide startup loans and this type of loan may not require a great credit history on their company due to the lack of business vintage. For judging the eligibility of the start-up, the lender organisation takes into account the borrower’s personal credit profile along with that of the organisation. They see the current financial conditions and turnover figures to provide loans and they may also consider deciding the loan amount, interest rate applicable and tenure.

Term loan – Term loans are most common type of business loan and this could be secure and secure in nature. The amount available depends on the history of the business and the 10 year is fixed and it may range between one to five years if it is unsecured and 15 to 20 years for the secure. This type of loans is mainly taken for the specific purpose generally for the capital expenditure.

Working capital loan – The working capital loan is type of loan for the SME’s so they can overcome the shortage of cash to operate daily business activities and helpful in generating the balance in cash flow necessary for the business to run. By taking the working capital loan organisations can deal with the shortfall of cash during the offseason. The most eligible applicants are manufacturers, service providers, retailers, wholesalers and traders engaged in export and import.

Business Loan

Top institutions in India to take business loan

  1. ICICI Bank
  2. State Bank of India
  3. HDFC bank
  4. Kodak Mahindra bank
  5. IDFC first bank
  6. IndusInd bank
  7. Axis Bank
  8. Bajaj FinServ

Interest rate by the Indian financial institutions for the business loans

Lenders Interest rates Loan amount (₹) Loan tenure
HDFC Bank 10- 22.5 % P.a 50000- 50 lakh 12 months to 48 months
ICICI 18 % p.a 50000- 50 lakh 12 months to 60 months
SBI 15%  p.a Up to 50 Lakh Up to 36 months
Kotak Mahindra 16- 26% p.a Up to 75 lakh Up to 48 months
Bajaj FinServ 10% – 30% p.a 50000- 50 lakh 12 months to 48 months
IDFC 10.59% p.a onwards 1 lakh to 50 lakh Up to 15 months
IndusInd 16% p.a 50000- 50 lakh 36 months
Axis Bank 15% – 20% P.a 50000- 50 lakh Up to 12 months

Charul Nalwaya

Charul is a content marketing professional and seasoned content writer who loves writing on various topics with 3 years of experience. At Tata nexarc, it has been 2 years since she is helping business to understand jargon better and deeper to make strategical decisions. While not writing, she loves listing pop music.