Understanding Business Loan Interest Rates, Fees and Charges

There are numerous reasons why a business would need money. Thankfully, with the increase in non-banking financial institutions, fintech companies and other lenders, businesses have numerous financing options to get the job done.

The access to funds has enabled many small and medium businesses to confidently run their businesses without fear of “running out”. These lenders provide business loans to fund day-to-day requirements, expansion, growth, innovation, and diversification of trajectory.

If you are a business owner looking for a loan to run, expand, or grow your operations, you can choose from one of these eight types of business loans:

Types of business loans available in India

Depending on the purpose of disbursement, business loans are known by different names. However, they can be broadly classified under these eight categories:

• Term loans

Term loans can be of short term, medium term, or long-term. Their tenure ranges from about a year to five years, depending on the terms of the lenders. Banks and financial institutions offer different types of term loans to businesses at a fixed interest rate for an agreed tenure. They are secured and affordable loans.

Businesses can use these term loans to buy new machinery, expand their business, diversify their products, buy raw materials, etc. They can use this for the overall development of their business.

• Cash credit

When you want quick cash to carry out daily operations, you can opt for cash credit. This is a simple type of working capital loan. The lenders fix different credit limits for borrowers based on their current liquidity and future orders from customers.

Borrowers can withdraw funds to the maximum of this credit limit, and can use this to cover their daily operations. This loan is quick, flexible and carries interest only for the amount withdrawn and not for the entire credit limit.

• Overdraft

This is almost similar to cash credit, with the only difference being banks involved here. Banks and financial institutions require collateral from you to allow you to withdraw funds in excess of what’s there in your bank account.

They charge you a reasonable interest rate for these excess withdrawals. Overdrafts are quick to access, and they are quite flexible as well. If you provide proper collateral, you may get an attractive interest rate for your overdraft loans.

• Letter of credit

When your business deals with international trade, you can make use of a Letter of Credit (LoC) to process your transactions smoothly. The LoC is a system where your bank or financial institution takes up the guarantee for your transactions, thereby assuring your suppliers/exporters of prompt payment.

A LoC lends credibility to international transactions and mitigates the risk involved. Letters of Credit are affordable and effective types of business loans.

• Business loan against property

This loan comes in handy, if you require funds for expansion. As the name indicates, this is a type of loan where banks and financial institutions provide loans against your collaterals. Collaterals are usually residential or commercial properties, in this case.

These are secured business loans. Therefore, they come with longer repayment tenures and reduced interest rates, making them a good choice of funds for you, especially if your requirement is huge.

• Gold loan

As the name suggests, banks and financial institutions provide you with loans against collateral, which is in the form of gold or bullion only. Gold loans are easier to access than business loans against property. Their disbursal process is quick and hassle-free, making them a good choice for small businesses looking for quick cash.

• Factoring

If you urgently need working capital to run your business’s day-to-day affairs, you can resort to factoring. Here, where you sell your invoices to a factor. Usually, banks or financial institutions play a factor role.

They buy your invoices and provide you with a loan that matches your future receivables. This way, you can use your idle invoices to increase your liquidity. Factors will then contact your customers and collect the outstanding payments from them.

• Unsecured business loan

If you don’t have any collateral for a secured business loan, you can opt for an unsecured business loan for quick funding. Lenders check your financial health and credit history before sanctioning a fixed loan amount for you to be repaid within a specific tenure.

However, due to their soaring interest rates, unsecured loans are a risky proposition. Also, many private lenders may come into play in these types of loans, making it a lot riskier for borrowers than in the case of secured bank loans.

Determining the right business loan for your needs

With so many types of business loans available at your disposal, how do you know which is the right fit for you? 

• Assessing your business needs and goals – Why do you need the loan? You have to have a clear answer to this question, as this will help you choose the right type of loan from the right lender.

• Evaluating loan terms and conditions – When checking for business loans from different lenders, you have to evaluate their repayment terms, interest rates, hidden costs (if any), and other terms & conditions in fine print. This will help to avoid unnecessary surprises later. You should know what you are getting into to be safe than sorry.

• Understanding interest rates and repayment options – Check with the lenders about their interest rates and repayment options clearly before getting a business loan from them. Check for the terms in case of defaults thoroughly, before opting for such loans.

What are the factors to consider when choosing a lender?

Today, you will find many types of lenders when opting for a business loan – banks, financial institutions, private lenders, online lenders, credit unions and more. How to choose the right lender? The three points to remember in this case are:

• Comparing interest rates and fees – Check all the fixed and variable interest rates, processing fees and other hidden costs of business loans charged by the lenders to choose the lender that charges you the least.
• Reputation and customer service of lenders – Always choose lenders that have been in the lending business for a long time. Check their reviews online and read customer testimonials to get borrowers’ feedback before selecting the right lender.
• Additional services and support offered—You should choose lenders who are available 24/7. They should also assign a representative exclusively for you to ensure you get a loan that is customised based on your needs.

Conclusion

With so many types of business loans and lenders available in the market, it may be a challenge to choose the one that is right for you. But TallyCapital enables you to sail through the business loan process successfully. With our streamlined lending process and strategic partnerships, this puts you in a position where you can easily access the financial support you need, while keeping you on what you do best – growing your business.

Getting timely financing is crucial for the success of any business. This is particularly true for MSMEs who rely on a steady flow of income to clear payments on time. So, how do businesses secure loans from banks or financial institutions? One of the primary tools used by lending institutions today to determine a businesses’ creditworthiness is their credit score. 

So, what is a credit score, and how would an individual or business know if they have the right score to secure a loan? This blog will answer all of the questions about the importance of a good credit score and how businesses can secure a business loan with ease.   

What does the credit score indicate about a business?

A business credit score is a number that indicates whether a company is a good candidate to receive a loan or become a business customer. Business credit scores are determined by credit scoring companies using a range of criteria, such as credit history, age and size, and legal issues.

Similar to how individuals are given a CIBIL Score between 300 and 900, companies are given a CIBIL Rank between 1 and 10, with Rank 1 being the best with a high likelihood of receiving funds and Rank 10 being the worst with little chance of credit approval. 

Businesses get scored from the information provided by lending banks and financial institutions. Factors like a business’s history of payment, credit usage, and financial health, among others, are assessed while generating a credit score. 

The following are some major advantages of having a high business credit score:

1. Determines the creditworthiness of a business

Establishing your business creditworthiness is critical for obtaining funding and cash for your company as well as for further expansions. Your credit score plays a major part in this process. Moreover, the business’s credit score affects the amount of funding you have access to, the terms and conditions of your loan, and the interest rates.

2. Speed up the borrowing process

Having a good business credit score makes it easier and less stressful to obtain financing. It also increases the likelihood that your loan will be approved quickly. Furthermore, it strengthens your application and establishes the credibility of the business in the eyes of the lender.

3. Higher loan approvals

Depending on your company’s needs, you might need to have access to a significant amount of credit. Having a high credit score empowers you to negotiate a larger loan amount and serves as evidence that you are a responsible borrower.

4. For lower interest rates

If your business credit score is strong, lenders will be more willing to offer you competitive interest rates. You can bargain for reduced interest rates by establishing yourself as a low-risk borrower.

5. Flexible loan tenure

If your company’s credit score is high enough, you may be able to work out a longer loan term and a flexible repayment plan that’s compatible with your cash flow.

How can businesses improve their credit score?

While there isn’t one way to raise your company credit score, you can take measures to increase your business credit score.

1. Check your credit report periodically

Periodically review your credit report and report any errors. There are platforms/portals that offer a free company credit score check. By providing a few simple company facts, you can receive your most recent credit score and comprehensive credit report in just a few minutes. 

Watch out for mistakes or inaccuracies. Your business’ rating may be impacted by even a little error, such as an incorrect mobile number. Make sure to report any errors or inconsistencies to the credit agency and have them corrected as soon as you see them on your credit report.

Take note of the following indications when you review your company credit report: 

• High credit utilisation 
• Many credit accounts, including loans, credit cards, lines of credit, OD, etc. 
• Bounced cheques 
• Defaults on loans 
• Negative cash flows 
• If you see any of these warning signs, you must act appropriately to raise your company’s credit score. 

2. Pay your bills on time

One of the simplest ways to raise your credit score is to make rent and utility payments on time to suppliers, lenders, and utility companies. You may have to shuffle your cash flow to beat the due dates, but getting ahead of your payments—even by one or two days—can raise your credit score.

To guarantee that you pay on time, consider the following advice:

• Organize your payables using a spreadsheet.
• For ongoing expenses like monthly debt repayment and utility bills, set up automated online payments.
• As soon as you receive an invoice, file it and make a note in your calendar to pay it on time.

3. Keep your credit usage ratio low

Your credit utilization ratio is the amount of credit utilized for a billing cycle. Credit reporting companies generally value lower credit usage ratios because they indicate that you are not using all of your available credit.

A good credit utilisation ratio is 30%, but an excellent ratio is around 10%. Assume you possess a business line of credit worth ₹200,000. In order to attain a 30% credit use ratio, you should spend a maximum of ₹60,000 during one payment cycle before paying off the entire amount.

What to do to reduce your credit utilisation ratio:

• Reduce your balances to a minimum. Paying off your bills on a regular basis decreases your credit usage ratio.
• Make small purchases throughout the month. To ensure your debt doesn’t grow too large, try making several small payments rather than just one large one.
• Raise the limit on your credit. Call your credit card company or credit issuer to ask for a higher limit. Your credit utilisation ratio falls when you raise your limit without also raising your balance.

4. Keep Your Old Business Credit Cards Active

Your credit history largely influences your credit score. A stable credit card or other loan accounts demonstrate consistency and indicate to vendors’ and suppliers’ confidence in your business. 

The older the credit account, the higher its impact on your credit score. When you cancel an old credit card, it erases your related credit history. Therefore, this history cannot be taken into account when determining your credit score. 

If you wish to eliminate a few of your business credit cards, you are advised to close the most recent ones to minimise the negative impact on your credit score.

Conclusion

Now that you know how to increase your business credit score, use the above tips to improve and maintain your business credit rating. In addition to providing access to new credit options, a good credit score also makes it easier for you to secure loans on more favourable terms.

You can also check your credit scores with TallyCapital for free. Some of the features of TallyCapital’s lending solutions are paperless documentation, instant approval, personalised advice, and hassle-free business loans. Tally ensures that your business gets the support it needs—fast and effectively. It does this by making the loan amount customizable, making procedures easy, and requiring no collateral.

There is no doubt that capital is one of the key things to survival in an almost unpredictable business world. A business loan can make a good weapon in your toolkit, necessary for eliminating problems and seizing chances to push your company more to success. This is regardless of whether you’re at the inception stage of your business journey or aiming to soar to new heights. Let’s review 5 reasons here why taking a business loan could be one of the most intelligent moves for your startup.

1. Kickstarting your venture

Starting your own business is an exciting journey, but it often requires a substantial amount of capital. From renting office space to buying initial stock or securing various licenses, the initial costs can be hefty. A business loan provides the necessary funding to cover these expenses, helping you set up a solid foundation for your business. This financial support allows you to focus on building and growing your business from day one.

2. Fueling business growth

Once your business is off the ground, the next step often involves expansion. Expanding operations can include acquiring new locations, hiring more people, or raising production capacity. In fact, these endeavors cannot move forward without money. A business loan puts in place the financial tools that can fuel different business growth strategies. 

3. Investing in equipment or inventory

Operational efficiency is one of the most important factors for a company’s success. It makes the difference between the winning and the losing companies. Investing in cutting-edge technology, which in turn improves the operations of the business along with upgrading old machinery, is a worthy investment. Nevertheless, such a kind of investment is also highly capital-intensive. A business loan can help you with such purchases all the while maintaining the level of cash reserves for a rainy day.

4. Covering unexpected expenses

It is possible no matter how well you plan for the future, you will encounter unforeseeable spending that can hinder your business flow. This could mean any extra expenditure like emergency repairs or unexpected legal fees. It is always helpful to have more money in hand from a business loan when time is that critical. It guarantees that you can quickly handle unexpected situations and keep your business operating efficiently by eliminating financial challenges.

5. Boosting Your Marketing Efforts 

In today’s competitive market, effective marketing is essential to stand out. Whether it’s through digital marketing campaigns, social media advertising, or traditional marketing methods, getting your brand in front of potential customers is key. However, marketing campaigns can be expensive. A business loan can provide the capital needed to fund these initiatives, allowing you to reach a wider audience and increase your market presence. 

Why choose TallyCapital for your business loan 

Like seeking a business loan, selecting the right lender becomes as important as the decision to be financed. TallyCapital, available exclusively to TallyPrime customers, stands out as a prime choice for businesses seeking not just funds, but a partner in growth. Here are several reasons why TallyCapital could be the best option for your business loan needs: 

Quick procedure 

By taking advantage of the already established connection with Tally, the loan application procedure is considerably speeded up due to the decrease in wait time.

Collateral-free loans

We acknowledge the obstacles faced by young and new companies in raising capital, therefore the loans through our lending partners are collateral-free.

Competitive interest rates

Through negotiations with our lending partners, we make sure that our interests remain one of the lowest in the market, thereby providing a more convenient and affordable financing structure for our customers.

Flexible funding options

Through our lending partners, we provide lending from ₹50,000 to ₹75 lakhs to businesses of all sizes which allows them to get funds necessary for growth and success. 

A business loan can be the solution for businesses looking to fund various activities like buying raw materials, meeting day-to-day expenses or paying utility bills. While applying for a loan is fairly straightforward, banks and financial institutions have an eligibility criterion for borrowers. 

Adequate financing is the lifeblood of MSMEs in India. However, research from the Ministry of Micro, Small and Medium Enterprises shows that around 70% of all businesses shut down after only the first year. Unfortunately, for many MSMEs, access to timely funds is a hugely limiting factor. 

In the following blog, we will look at the eligibility criteria and the documents required for the smooth disbursement of these loans.

Eligibility Criteria  

Most banks and financial institutions provide tailor-made business loans to eligible applicants. The amount disbursed depends on the nature and the size of the businesses. How can businesses qualify for these loans? To know more, read on. 

• Age factor

The borrower must be between the ages of 21 – 65 to be eligible for a business loan. While this may be generally the case, you should check with your lender about their specific age requirements set by them. 

• Legal registration of business

Businesses must be formally registered with the Government of India.  Types of registration can include individual, sole proprietorships, partnership firms, private companies, and others.

• Minimum business turnover per annum

Banks and financial institutions expect borrowers to have a minimum annual turnover of ₹25 lacs to qualify for a business loan. However, some banks may fix this limit at ₹40 lacs as well. Hence, it is important to study the eligibility criteria of the lenders thoroughly before approaching them for loans.

• Experience of borrowers

Borrowers should have at least two years of business experience in their current location to be eligible for a business loan. Some banks may consider the overall business experience of the borrowers (irrespective of the location). In some other cases, banks may require borrowers to have completed at least three years of operations in the current location

• Profitability Factor

A business should have generated profit for a minimum of 1 year to become eligible for business loans. Its financials should be strong and creditworthy enough to qualify for these loans.

• Income factor

All the earnings of borrowers should either originate from their businesses or their investments. Banks look closely at the source of income of borrowers before granting them loans for the day-to-day running of their businesses.

• Credit score

The CIBIL score or the creditworthiness score of a business owner should be 700 and above to qualify for a business loan. In some cases, banks/financial institutions also grant loans to borrowers who have a minimum credit score of 650.

• Repayment capacity

Credit score and the repayment capacity are two important factors that banks and financial institutions check about a borrower. Borrowers need to submit their tax returns, income statements, balance sheets, and other important business documents to prove their financial health and repayment capacity to the banks.

• Other factors

Banks also check the financial history of borrowers to know if there have been any defaulted payments in the past. Borrowers need to have a clean financial record to qualify for business loans. Also, if they are owners of any type of property (residential, commercial, warehouses, etc.), they stand a better chance of getting business loans.

Documents Required for Business Loans

Borrowers need to submit all these documents along with their business loan forms to process their loan applications.

• PAN Card (individuals, firms and companies)
• Valid ID Card (can be one of these – AADHAR card, passport, Voter’s ID, PAN card, driving license)
• Valid address proof (can be one of these – AADHAR card, passport, Voter’s ID, driving license)
• The last six months’ bank statement of the business
• Latest Income Tax Returns
• CA audited/certified copies of the Income Statement and Balance Sheet for the last two years
• Proof to show continuation of business (can be one of these – income tax returns, trade license, establishment certificate or sales tax certificate)
• Other important documents that are key to the nature of the business (declaration of  sole proprietorship, partnership deed, director-certified copies of Memorandum of Understanding and Articles of Association,  and the like)

Important note – These are the usual documents that are required to be submitted along with the application for a business loan. However, it is important for borrowers to check with their specific lenders if there are any additional documents required to ensure that their application doesn’t get rejected.

Bottom Line

A business loan can help businesses carry out their daily operations, buy raw materials and equipment, and plan for further business expansion. Hence, borrowers should ensure that they make full use of such loans by knowing the full details about eligibility and the documents required at the time of application.

Like seeking a business loan, selecting the right lender becomes as important as the decision to be financed. TallyCapital, available exclusively to TallyPrime customers, stands out as a prime choice for businesses seeking not just funds, but a partner in growth.

Here are several reasons why TallyCapital could be the best option for your business loan needs: 

Quick procedure

By taking advantage of the already established connection with Tally, the loan application procedure is considerably speeded up due to the decrease in wait time.

Collateral-free loans

We acknowledge the obstacles faced by young and new companies in raising capital, therefore the loans through our lending partners are collateral-free. 

Competitive interest rates

Through negotiations with our lending partners, we make sure that our interests remain one of the lowest in the market, thereby providing a more convenient and affordable financing structure for our customers.

Flexible funding options

Through our lending partners, we provide lending from ₹50,000 to ₹75 lakhs to businesses of all sizes which allows them to get funds necessary for growth and success.

Securing a business loan is essential for the growth and sustainability of businesses in the competitive Indian commerce landscape. However, various obstacles can make the loan application process challenging for business owners. Here, we discuss five common challenges that businesses face when seeking loans in India, along with strategies to overcome them effectively.

1. Lack of collateral

Many new or small businesses struggle because they lack sufficient assets to use as collateral. Collateral typically includes valuable items such as buildings, land, or expensive equipment that banks can hold as security for the loan. Without these assets, lenders may view the loan as high-risk, potentially leading to rejection of the application or imposition of high-interest rates.

2. Lengthy procedures

Applying and successfully obtaining business loan can include a lot of unnecessary steps and take long to complete. This elaborate procedure is a time taking process, usually comprising of thorough examination of the company’s creditworthiness, such as its financial statements along with its business plans and credit assessment which may take several weeks and even months to complete. During this period, the business operations might experience negative implications as the CEO and other owners spend more time navigating the loan process than on one’s business itself.

3. Unaffordable interest rates

The interest rates offered by lenders can be high, particularly for small to medium-sized enterprises as they seem risky to financial institutions. These rates determine the monthly repayment amounts, and if they are too high, it can strain the business’s finances. High interest rates could cause an extra burden in paying back the loan amount and in some cases might push a business beyond the point of no return.

4. Low credit score

Many small ventures in India have little credit limits as a result of their lack of knowledge in dealing with credits, the inconsistent activities on their records or they have had poor track records in handling loans in the past. The credit score is therefore a vital tool that banks rely on heavily when they are assessing the viability of giving credit or a loan. A low score can make it very difficult to secure a loan, as it suggests to lenders that the business may fail to meet repayment schedules.

5. Insufficient funds available

Businesses may find that even if they qualify for a loan, the amount approved by the lender may not be enough to meet their actual needs. This could occur if the lender is very cautious about risks or doesn’t fully comprehend the business’s operational requirements. When a business doesn’t receive the necessary funds, it may struggle to execute its plans effectively, resulting in slower growth.

How TallyCapital can assist

Recognizing these challenges, TallyCapital has developed a customized solution for our current Tally customers, facilitated through strategic partnerships with FlexiLoans and Kotak Mahindra Bank.

Key advantages of TallyCapital:

Quick procedure: By taking advantage of the already established connection with Tally, the loan application procedure is considerably speeded up due to the decrease in wait time.

No collateral required: We acknowledge the obstacles faced by young and new companies in raising capital, therefore the loans through our lending partners are collateral-free.

Competitive interest rates: Through negotiations with our lending partners, we make sure that our interests remain one of the lowest in the market, thereby providing a more convenient and affordable financing structure to our customers.

Access to the funds you need: TallyCapital understands the significance of receiving the right footing required by your business. Through our lending partners, we provide lending from ₹50,000 to ₹75 lakhs to businesses of all sizes which allows them to get funds necessary for growth and success.

Conclusion

It goes without saying that getting a business loan in India is not that easy, but TallyCapital enables you to sail through this process successfully. With our streamlined lending process and strategic partnerships, this puts you in a position where you can easily access the financial support you need, while keeping you on what you do best – growing your business.