Capital is one of the most critical elements of any business, and it is true for both new startups and established companies that have been around for years. Capital requirements could be of two types – money required to build assets for the business, and money needed to maintain the ongoing expenses of the company. A business that is just starting off would need more of the fixed capital to set up things, and once it gets going, the working capital would become more necessary to meet running costs.
What is a business loan?
The lack of funds to meet necessary expenses is what drives most companies to apply for business loans. Banks, in most cases, approve loans to two categories of professionals – the self-employed professionals like doctors and architects, and business owners. Given the increasing number of technology startups, most banks have also designed specific loans for small businesses as well. Even for companies such as real estate businesses that do not require substantial capital to operate, some banks provide realtor commission advances.
When does a business qualify for business loans?
Business owners need to know a few essential details before applying for loans from traditional lending institutions such as banks. These are some standard parameters that determine a company’s eligibility for a loan:
- The business should be duly registered under competent authority, and the owner should possess all the necessary documents and unique identifying elements.
- The business should have had submitted financial statements such as balance sheets and profit and loss account for at least a year, and preferably three years.
- The directors or partners of the company should have valid ids and address proofs. Banks usually do not like to see post box addresses of a company or its directors.
- The purpose of the loan should be spelled out, and the company’s balance sheet should provide evidence of the capability of repayment.
What other factors should an eligible applicant consider?
Even after passing the eligibility criteria, a business needs to work out several other details before getting the loan approved. The owner must find out what documents are necessary for applying and get it ready on time. After this, the applicant must understand the loan terms including interest rate and repayment period, and he or she may also have to negotiate to get a favorable deal.
Some business loans are given as term loans, in which the total approved amount is disbursed at once, and the business owner pays interest on it. Some loans are extended as lines of credit, of which the business owner can use what he wants and pay interest only on that amount. Finally, the business owner needs to be clear about his monthly repayment schedule based on the type of loan he is getting.
Some entrepreneurs start their business with their own capital or by taking soft loans from family or friends, but the majority of business owners need funding for their business, especially in the initial stages of the enterprise.