What is Business Loan: Meaning, Types, Benefits & How to Get One

Every business owner, whether small or large, deals with a number of expenses every day, whether it is for stocking up inventory or buying equipment. All of this requires funds, which may not be readily available. In this situation, a business loan or business financing proves to be the best way to get access to the necessary funds.

If you are a part of the MSME community, you contribute 33% to India’s GDP and employ 12 crore individuals across all sectors. You are the main drivers of India’s growth, and this is why both lenders and the government support you with a loan for business. The government offers many business loan schemes of its own with subsidies. Before you apply for one, know the business loan meaning, its types, and benefits.

What is a Business Loan?

Before we jump into the types and benefits, let’s first understand what is a business loan. A business loan definition refers to a type of financing that banks, financial institutions and NBFCs offer specifically to businesses to help them cover various business expenses. The prime business loan purpose is to help you cover only business-related expenses like buying equipment, covering operating expenses, and/or more.

A lender provides you business loan capital that you must pay back with both the principal amount and interest over a set period. Business loans also serve different objectives and cover different expenses like:

• Purchasing inventory or equipment
• Launching or expanding operations
• Hiring and training staff
• Managing cash flow gaps
• Investing in marketing or technology

Business loans provide specialized financial assistance to businesses because they offer adjustable payment terms alongside beneficial interest rate options. As with any financial product, it has varying features, terms and benefits. To reap them all, you must understand different business loans and benefits.

Business Loan vs Personal Loan

The key difference between personal loan vs business loan is that while you can use a personal loan for medical emergencies, travelling, marriage, and business, too, lenders provide business loans only for business-related expenses.

Different Types of Business Loans

Lenders provide essentially business loans for a certain purpose and demand. However, as a business owner, you know that every business is different, and so does the need for financing. This is why there are different types of business loans in India that cater to the varying needs of your businesses.

Each business loan type serves a different purpose and offers different terms. Understanding the types of business loans gives you the knowledge necessary to choose the right funds for your business, whether you’re a manufacturer in Ludhiana or a startup founder in Bangalore.

1. Term Loans: Providing Long-Term Development

A term loan is a short-term loan in which a fixed amount is borrowed for business expansion and capital expenditure. Both private lenders as well as public sector banks offer term loans with interest rates that range from 12 to 24%. These extend over predetermined periods (one to ten years) and are ideal for the following:

• Investing in equipment and machinery
• extending to new areas
• Remodelling commercial buildings

2. Working Capital Loans: Keeping Operations Smooth

Working capital loans provide funds for a business’s ongoing operations in order to maintain operational continuity and steady cash flow. These are quick business loans that are ideal for seasonal businesses like retailers during the holiday season. These (12-36 months) short-term loans also assist in managing the following:

• Purchases of inventory
• Pay employees salary
• Utility and rent payments

3. Government-backed Loans (MUDRA/SVG)

The Government of India realises that businesses, especially SMEs, are the main drivers of our economy. This is why the government has set up many SBA loans and schemes for business loans to drive growth and the economy. Here are all the schemes that you can use to apply for a business loan online:

• MUDRA Loans (₹50,000–10 lakh) under PMMY
• Stand-up India (₹10 lakh 1 crore) for SC/ST and women is India’s equivalent of SBA loans
• CGTMSE program for loans without collateral

4. Business Lines of Credit: Flexible Funding

Business Lines of Credit enable businesses to borrow money up to a certain limit, repay, and borrow again as needed. When necessary, it enables businesses to borrow either in one lump payment or in incremental installments.

• Reusable credit limits
• Interest only on the amount utilised
• Digital access via banking applications

5. Invoice Financing: Solving Payment Delays

Invoice financing enable businesses to borrow money against the amounts owed by clients. Compared to waiting until their customers paid their accounts in full, invoice financing enables firms to increase cash flow, pay suppliers and workers, and reinvest in operations and expansion sooner.

• Businesses can use TReDS platforms to Reduce corporate buyer invoices
• Receive money in 48 hours
• Access rates are competitive when compared to traditional loans

6. Merchant Cash Advances

Small- and medium-sized business owners often encounter temporary liquidity shortages. As a result, merchants in India use Merchant Cash Advance to ease the cash shortage. A merchant cash advance allows you to pay your suppliers a one-time payment in advance via regular or recurring credit or debit card transactions.

• Advances against upcoming card and UPI sales
• Automatic payment via transaction percentage
• Minimal documentation

7. Equipment Financing: Sector-Specific Solutions

If you need funds to upgrade your existing machinery or buy new equipment, getting equipment financing is a wise decision. It grants you a loan, especially to buy new equipment or machinery. It is ideal for you regardless of whether you are a major firm or a small to medium enterprise.

• NABARD schemes for agricultural equipment
• Textile equipment (subsidies from TUFS)
• Medical supplies (Ayushman Bharat programs)

8. Secured Business Loan

A secured business loan is a type of financing where you have to pledge collateral, such as real estate, machinery, or other assets, to get the loan. These loans are appropriate for companies wishing to finance major projects, buy assets, or grow their operations since they usually have lower interest rates and bigger borrowing limits.

9. Unsecured Business Loans

Lenders approve unsecured business loans based on the borrower’s creditworthiness and financial situation and do not call for collateral. They are perfect for companies that want quick access to cash for working capital, marketing campaigns, or short-term operating costs. If you want to get financing without risking your assets, FlexiLoans provides unsecured business loans for all your business loans at competitive interest.

Secured vs Unsecured Business Loans

Feature	Secured Loans	Unsecured Loans
Collateral	Property/equipment	Not required
Interest Rates	8-12%	12-24%
Approval Time	7-15 days	1-3 days
Best For	Large investments	Emergency funds

Through both traditional and digital channels, the Indian financial ecosystem currently provides online business loans with ease. No matter where you are, you can apply for business loans online to obtain funding that supports growth while preserving your financial stability.

How Do Business Loans Work?

Depending on a business’s nature and creditworthiness, you can apply for both unsecured or Depending on a business’s nature and creditworthiness, you can apply for both unsecured or secure business loans. Though the business loan process nowadays is online, you still have to be careful when applying to avoid rejection and delays. You must also understand how business loans work.

While you may have to pay higher interest for unsecured loans, secured loans can put your assets at risk. Once terms are met and agreed upon, lenders disburse the money as a line of credit or lump amount, with interest and payback plans specified.

Eligibility for the Loan Application Process

• Basic Prerequisites: At least 2 years of business vintage and a monthly turnover of at least ₹2 lakh.
• Minimum Income Requirement: Your business should meet the minimum income requirement necessitated by the lender.
• Age Requirements: When applying for a business loan, the applicant must be at least 21 years old, and when the loan matures, they must not be older than 65.
• Indian Citizen: You must also be an Indian citizen in order to be eligible for the business loan.
• CIBIL Score: Banks or lenders require you to maintain a good CIBIL score of 700 or higher, while NBFCs need a score of 600 or higher.
• Bank Statements: The required documentation also includes one-year bank statements and GST returns for the previous six months.
• Additional: Besides all these, you will also have to supply ITR (last two years), KYC, and business licenses when and if necessary.

Key Approval Factors for Indian Lenders

• Business Credit Score: A robust business credit score raises the possibility of obtaining a loan with favourable terms and shows financial stability.
• Financial History & Stability: To evaluate a business’s profitability, revenue patterns, and general financial health, lenders examine its financial accounts.
• Collateral: By providing valuable collateral, such as real estate or machinery, the lender lowers their risk and can negotiate better business loan terms.
• Time in Business & Industry Risk: Loan acceptance rates are higher for well-established companies with a track record of steady operations and a low-risk industry profile.
• Personal Credit Score & Guarantee: Particularly for new and small businesses, lenders may look at the owner’s personal credit history and demand a personal guarantee.

Benefits of Business Loans

There are a number of benefits of business loans you get access to after applying for it. Here are all the advantages of business loans you must know:

• Access to Growth: You can better position your business for growth and expansion with a business loan. One example of this is installing a production line to boost your manufacturing.
• Management of Cash Flow: It allows you to fill in the gaps between payables and receivables to improve cash flow. It helps you stack up your inventory before the holiday season.
• Prospects for Business Growth: If you are seeking expansion, a business loan helps you achieve it by launching new stores, modernising technology and buying new equipment.
• Establishing Credit: EMI payments made on time help you build a strong CIBIL score that allows for better rates on larger future borrowing.
• Benefits of Taxation: As per the Income Tax Act, the tax is deductible on interest paid on a business loan under Section 80C of the Income Tax Act of 1961.

How to Qualify for a Business Loan

Some lenders offer both secured and unsecured business loans. However, you need to meet lender-specific eligibility criteria to qualify for a business loan. The terms and qualifications remain a question as they all follow different business loan eligibility criteria. Here is how to get approved for a business loan:

• Business Vintage: Your business must be in operation for at least two years. Startups, on the other hand, can be eligible for special programs, such as the Startup Loan offered by SIDBI.
• Profile of Credit: Having a solid CIBIL score is important when applying for a business loan. 700+ is a good score that increases your chances of getting a business loan.
• Economic Well-being: Although not all of them, a few lenders seek an annual turnover of at least ₹10 lakh. Maintaining strong financial books and profitability gives you an edge for successful approval.
• Required Documentation: In order to ensure the application isn’t rejected due to lack of documentation, you must handily keep GST returns for the previous 12 months, statements from banks (6–12 months), income tax returns and other important documents.
• Collateral: It can be necessary for loans exceeding ₹10 lakh, depending on the lender. You can pledge your inventory, FDs, property, and equipment as collateral to qualify for the loan.

Conclusion

Poor cash flow is one of the important reasons why small businesses fail. This is why businesses need funding from the outside. Business loans prove to be an effective financial instrument here as they provide businesses with the funds they require for growth, cash flow control, and stable operations.

As a business owner, you can make wise choices by being aware of the different types of business loan options, the requirements for qualifying, and the typical problems. Whether you run a small Kirana store or online shop, evaluate your needs, evaluate lenders, and use financing to drive growth. Your company can become more financially resilient and scalable with the precise loan.

FAQs about Business Loan