Running and maintaining a business requires streamlining a number of operations, especially finances. Due to many reasons, businesses may seek a loan. As long as you are in the position of repaying the loan amount, there is no problem in opting for a business loan. It increases cash flow in the company to be used for essential business tasks. As a business owner, you may be aware of the term cash flow.
However, when it comes to a loan, there are various business loan terms that you may not be aware of. Before you seek a loan for your business, make sure to be updated with new terminologies so you can make the most of your decision. This article explains essential business loan terms that every entrepreneur must be aware of. So, continue reading to know more.
What is a Business Loan?
A business loan definition can be stated as a financial product that provides funds to business owners. It helps them meet various operational and expansion needs. This type of loan is designed exclusively for business-related expenses. This may include paying employee salaries and rent, purchasing essential equipment, or funding expansion into new markets. The loan amount when once disbursed must be used strictly for business purposes as per Indian lending guidelines.
Lenders assess the borrower’s creditworthiness through criteria like credit score, business turnover, and profitability. The loan term also outlines an interest rate and repayment tenure. This requires borrowers to repay the principal amount with interest within the agreed period. Business loans offer a structured way for businesses to access much-needed funds without diluting ownership.
What is the Average Business Loan Term?
A loan term typically refers to the tenure of a loan. If you borrow a business loan, the loan term specifies the time period under which you need to repay the loan amount. Also, a loan document contains various terms of a business loan and as an entrepreneur, you must be aware of these business loan terms. Depending on the chosen lender, the repayment terms may differ ranging from a few months to a few years or longer than 20 years as well. Different types of business loans and their terms are:
Secured Business Loan
A secured business loan is borrowed by pledging an asset or business shares to the lender. Hence it is termed as a secure business loan. It is usually borrowed for a longer term. It may range from a few years to 10 years or even longer. The interest rate charged on secure long-term business loans is low since the lender has a longer recollection time.
Unsecured business loan
An unsecured business loan, as the name suggests, does not require the pledging of an asset by the entrepreneur. Usually, small and micro-sized businesses avail of unsecured loans. Since there is no collateral, the loan amount is restricted and less as compared to secure business loans. The loan terms of unsecured loans are also small for a few months or a few years.
Working capital loan
Unlike term loans (secure and unsecured business loans), a working capital loan. is usually borrowed to meet the immediate and day-to-day financial requirements of the business. It is mostly a collateral-free loan with higher interest rates. The repayment term and the loan limit are decided at the time of borrowing the loan.
Overdraft loans
For times when the immediate cash flow of the company becomes zero, an overdraft loan can be a good option. It allows you to withdraw money even after zero balance. Depending on the business and the repayment capacity, the OD loan limit and the repayment term are fixed. Interests are only charged for the withdrawn amount and not on the entire OD loan limit.
These are some of the types of business loans that an entrepreneur can borrow to meet the financial requirements of the business. On average, the business loan term ranges up to 5 years.
Also Read: What is the difference between Cash Credit and Overdraft?
Term Business Loans
These are straightforward loans with a fixed term, usually between 1 to 5 years. Term loans are often used for specific projects or expansions, where borrowers need to state the purpose. Approval depends largely on the business’s financial health and credit history, and repayment terms are fixed.
Commercial Business Loans
Commercial loans are designed for high-turnover businesses needing quick access to substantial capital. These loans can offer up to Rs. 50 lakhs and more with a 3 to 5 years tenure. They are suitable for companies with a stable financial record, and the funds can be used for business expansion, stocking inventory, or other high-scale business expenses.
Startup Loans
With India’s growing startup ecosystem, startup loans are ideal for emerging entrepreneurs. These loans are unsecured; this means you do not need collateral to get them. They even provide flexibility in repayment terms. Such loans help in scaling business operations or meeting the initial costs of establishing a business.
Equipment Financing
This type of loan specifically helps in purchasing essential machinery, equipment, or technological upgrades. Equipment financing allows businesses to buy expensive equipment immediately, often with lower interest rates, as the equipment itself can sometimes act as collateral.
By understanding business loan information and types, you can apply for the required loan for your business.
Essential Business Loan Terms
Once you know the loan tenure, you also be aware of business loan terminologies. There are various sources of finance for entrepreneurs and as a company, you need to decide the most suitable, profitable, and comfortable source. In case you are seeking a business loan, here are some of the loan terminologies you must know about apart from the average loan repayment term:
Working capital
Working capital is the cash in the hands of the business. This is the amount that you can use immediately for a business operation. Working capital primarily is funds available after deducting the debts.
Blanket lien
A blanket lien is a term used in business loans to refer to security against the loan. The lender has a blanket lien to cover the losses in case the entrepreneur fails to repay the business loan. It may confiscate property(s) to cover the financial losses suffered.
Accounts payable and accounts receivable
A business has two accounts that show details of borrowings and lending. The accounts payable are details of the loans borrowed by a company which had to be paid back. Accounts receivable are the amount lent by the company to other businesses.
Cash flow statement
As the name suggests, a cash flow statement contains details of the cash flow of a business. It mentions borrowings, expenses, and any other financial movement in the business. Usually, a cash flow statement is prepared monthly to analyse net business expenses and current working capital.
Line of credit
A line of credit can be seen as a credit card. It is a type of business fund where the business is fixed on a line of credit that it can use, just like a credit card. A business can withdraw an amount up to the line of credit and repay as per the repayment terms.
Also Read: Working Capital Financing to Make Your Business Agile
How to Get Finance for Business in India?
Businesses in India can access funding through various channels. Here’s an overview of the primary options:
- Government Loans
The Indian government supports businesses through schemes like the MUDRA loans, Stand-Up India, and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). These initiatives focus on promoting entrepreneurship and are accessible to micro, small, and medium enterprises (MSMEs) and startups. Government loans typically offer lower interest rates and flexible terms, making them a popular choice among small business owners.
- Banks
Traditional banks in India offer a range of business loans tailored to different needs, from working capital loans to long-term funding options. Banks typically have more stringent eligibility criteria requiring a solid credit history and documentation. However, they offer higher loan amounts and competitive interest rates. Many Indian banks, including public sector and private banks, are key sources of finance for businesses seeking stable and structured funding.
- Non-Banking Financial Companies (NBFCs)
NBFCs like Lendingkart have become a popular choice for businesses that might not meet traditional bank requirements. They are known for quicker processing times and more flexible eligibility criteria. NBFCs cater to a broader range of businesses, including those with limited credit history. Many NBFCs also specialise in niche sectors and provide customised loan products that can better align with unique business needs.
Conclusion:
Business loans can be a great solution to meet the upcoming financial needs of the business or to fulfil an immediate requirement. However, the key is to make sure your business is capable of following the repayment terms to avoid rupturing the credit history of the business or suffering any legalities.
On average, a business loan term is 5 years within which the entrepreneur has to return the loan amount as per the terms and conditions. Failing to do so may lead to confiscation of properties and legal actions. Before you plan a business loan, understanding the terms of a business loan, its tenure and conditions is crucial. Lendingkart offers a variety of business loans to help you kickstart or level up your business. We guide you through the entire process and make sure you have a seamless experience.
