Becoming a business owner is one of the most satisfactory feelings for any individual. Anyone who has toiled hard as an employee and followed orders from seniors, a business start-up helps them to become a master of their own fate finally. You are no longer answerable to anyone and can finally do things your own way. But as someone famously said that “With great power, comes great responsibility,” the same applies here. You now are responsible for every aspect of your venture, including arranging for finance in times of need.

Running a business is one of the most challenging tasks in the present economic scenario, and therefore, you must have ready access to necessary funds as and when required. As a matter of fact, unless you are a Multi-National Corporation, you cannot always meet your monetary requirements from your own funds as you simply do not have that luxury. In such a situation, the best option that you can avail is to apply for a Business Loanwith any of the financial institutions operating in India such as IDFC First Business Loan, HDFC Business Loan, ICICI Business Loan and many more.

What is a business loan?

Business Loan is an umbrella term used to represent various types of credit products offered by financial institutions for business purpose only. Depending on the needs of the business owners, financial institutions offer multiple types of financial products, suitable for varied requirements of a business organisations.

Business loan interest rates start from as low as 11.5% per annum and can go upwards of 20%, depending on your profile and the nature of the loan requirement. The maximum repayment tenor for a Business Loan is usually around 60 months, but this can be extended based on the prerogative of the lender.

As Business Loans can be of various types, they can be broadly divided into three categories, i.e., secured, unsecured, and self-secured Business Loans. If you are confused about selecting the best option to meet your requirements, here is a detailed analysis of these loan categories for your perusal.

Unsecured Business Loan

During the initial stage of your business venture, you require loans to finance your operations as well as to acquire certain assets. But as you have just started your operations, you might not have any collateral to pledge with the lender. In such a situation, your best option is to Avail an Unsecured Business Loan. As the name suggests, unsecured loans do not require the borrowers to pledge collateral to secure the loan amount. However being an unsecured offering, the risk factor involved for the lender is high, and as such, the Business Loan Interest Rates charged for unsecured loans are on the higher side.

Following are some of the major features of unsecured business loans: –

  1. The maximum loan amount available as unsecured Business Loan can go up to Rs. 50 Lakh, depending on the profile of the borrowing company.
  2. Maximum repayment tenor for unsecured Business Loans is capped at 60 months.
  3. The interest rate charged against unsecured Business Loans starts from 13.5% onwards and can go beyond 22% per annum.
  4. Lenders can levy a foreclosure charge in case of pre-payment, as specified in the loan agreement.
  5. Borrowers can use the money as per their requirements. There is no need to inform the lender regarding the end usage of the money.
  6. As there is no collateral involved, borrowers do not face the possibility of losing out on the collateral.

Secured Business Loans

When your business has taken off, and you are on the path of growth, you required high-value loans to support your growth aspirations. In such a situation, you can opt for a secured Business Loan. As the name suggests, Secured Business Loans are offered by financial institutions to companies for their business-related requirements and are secured by hypothecation of collateral. In order to obtain a Secured Business Loan, you have to offer a personal guarantee or pledge tangible assets belonging to the business with the lender. Following are the major features of secured Business Loans: –

  1. There is no cap on the maximum amounts available as secured Business Loan and can go beyond Rs. 25 crore as well. The amount available is directly linked to the value of the collateral and profile of the borrower.
  2. Lenders offer secured loans as per their prevailing Loan to Value (LTV) ratio, i.e. borrowers can not get 100% of the value of the asset as a loan.
  3. Interest rates applicable against secured Business Loans start from 8.25% per annum. Interest rates are lower than secured loans as the risk factor is reduced for the lenders.
  4. Maximum repayment tenor available against secured Business Loans is 5 years.
  5. Lenders require the borrowers to submit details of expenses undertaken with the loan amount to ensure that the money has been used for business purpose only.
  6. In case of non-payment of the loan or any default, lenders can foreclose the loan by liquidating the collateral.

Self-Secured Business Loans

When you need to purchase a specific asset for your business requirements such as a car or a machine, you can opt for a self-secured business loan. These types of Business Loans do not require you to offer any collateral to the lender because the asset acquired with the loan amount, acts as the collateral. This feature puts self-secured Business Loans at par with Secured Business Loans. Here are some of the major features of self-secured Business Loans: –

  1. The maximum amount available as the self-secured Business Loan is directly linked to the value of the asset purchased. Lenders require the borrowers to pay some margin money to avail of this facility.
  2. The asset acquired must be hypothecated with the lender till the entire repayment as been made.
  3. Interest rates are on the lower side as the risk for the lender is reduced significantly.
  4. The loan amount is usually directly transferred to the seller of the asset and the seller issues the invoice with the endorsement for hypothecation.
  5. In case of non-payment of the loan or any default, lenders can foreclose the loan by liquidating the collateral.
  6. Self-Secured Loans are an excellent option to build a credit history for a business.

Different types of Business Loans have different utility and therefore, must be chosen carefully. Do remember that a Business Loan is a significant financial commitment and must be opted for only if an absolute essential.