Corporate Loans in India

Corporate loans can be a viable option if you are a business owner looking to secure financial assistance for your company's growth and expansion. They are tailor-made financial solutions designed to support businesses in various ways. They come in different types, each serving specific purposes to suit your unique business needs. Let's understand corporate lending in detail.

What is a Corporate Loan?

A corporate loan in India is a financial arrangement where businesses secure funds from financial institutions to support their operational activities or expansion plans. It serves as a crucial source of capital for companies to fulfil needs like buying equipment, increasing infrastructure, managing day-to-day expenses, or initiating new ventures. Corporate loans play a pivotal role in aiding business growth.

The process of this business loan involves several stages. First, the company applies for the loan by providing the necessary details about its financial standing and outlining the purpose of the loan. Subsequently, the lender examines the application and requests relevant documents, such as financial statements and business plans to assess the company's creditworthiness. Based on this evaluation, they decide the loan amount, interest rate, and terms. Following approval, the company receives funds, which it then utilises for specified purposes.

Corporate loans can be either secured or unsecured. The former usually have lower interest rates and higher loan amounts than unsecured loans, but they also involve the risk of losing the asset in case of default.

Secured loans necessitate a tangible business asset to serve as collateral, enhancing security for the lender. In instances of loan default, the lender possesses the right to seize the asset to recover the outstanding sum. Opting for secured loans can yield several advantages, including lower interest rates, extended repayment periods, and elevated borrowing limits, setting them apart from unsecured loans.

On the other hand, unsecured loans cater to immediate business funding needs. Financial institutions extend these loans without necessitating collateral or security. However, businesses seeking unsecured loans must exhibit strong credit ratings to be eligible.

Features and Benefits of Corporate Loans

Some of the noteworthy features of corporate credit products are as follows:

• Multi-Purpose Loans: You can take a corporate loan or an MSME loan to support various business needs, such as expanding operations, buying equipment, managing working capital, or funding new projects.

• Repayment Flexibility: You can decide the payback period according to your needs. If your profits are strong enough, you can choose a shorter tenure and save on the total interest you need to repay. Usually, a corporate credit loan repayment term ranges from 12-36 months. There are also a few products where this tenure can go over 60 months.

• Application Process: Corporate credit loans have a straightforward application process that will take just 5 minutes. Ensure you have all the necessary documents ready while filling out your application.

• Quick Approval: Corporate loan lenders make dedicated efforts to process loan applications quickly, ensuring timely access to funds. They have integrated advanced artificial intelligence (AI) and machine learning (ML) technologies into their credit evaluation systems, enabling them to assess the risk associated with your profile within minutes.

• Dropline OD Feature: Some online business loan providers offer a dropline overdraft facility. Under this, the lender opens a separate current account for the corporate loan amount. This arrangement allows you to pay interest solely on the borrowed sum.

• Tax Benefits: Interest on a loan for business, such as an MSME loan, is tax-deductible when recorded in your business financials. Furthermore, the loan proceeds do not fall under taxable income, enabling you to fund operations without facing additional tax liabilities.

• Customised Products: Your lender may offer you need-specific loan packages as customised solutions to match your business's unique requirements. These personalised offerings may include flexible terms, loan amounts, and repayment schedules. You may also find personalised business loans for women.

• Improved Efficiency: Fast access to corporate credit products streamlines the decision-making process. It allows you and your staff to focus on your company's core activities without unnecessary delays.
• Competitive Interest Rates: Corporate loans usually come with competitive interest rates. You can get approval at a lower lending rate if you have a stable business with a consistent revenue stream.

• Loan Amount: Corporate loans offer a substantial amount of money, allowing you to fund large projects or manage operational expenses. If you are a small business owner with a modest funding requirement, you can apply for funding amounts in the range of thousands of rupees.

• Debt Consolidation: If you have high-interest debt at the beginning of your business that has become unmanageable, you can apply for a new loan based on your credit history. If approved at a lower rate, you can use the funds to consolidate the high-interest debt and improve your financial situation.

Types of Corporate Loans in India

Different types of corporate loans are available in India, depending on the nature and needs of the company. Some of the common types are:

1. Term Loan

You may borrow a lump sum amount under this type of corporate loan for a fixed period and repay it in regular instalments with interest. Term loans come in different durations: short-term (up to 12 months), medium-term (1 to 5 years), or long-term (more than 05 years). You can use term loans for various purposes, such as injecting capital, acquiring or renovating property, buying new machinery, or upgrading technology.

2. Working Capital Loan

This is a short-term loan used to finance a business's day-to-day operations, such as paying salaries, suppliers, rent, utilities, etc. Working capital loans help your company to maintain its cash flow and meet operational expenses. Depending on the lender's criteria, these corporate loans can be asset-backed or unsecured. If collateralised, the underlying inventories serve as security.

3. Letter of Credit

This is a type of credit facility issued by a bank to a seller on behalf of a buyer, guaranteeing that the buyer will make the payment on time and for the agreed amount. This corporate credit loan also assists in facilitating international trade transactions, where there is a risk of non-payment or fraud by either party. 

4. Bill Discounting

This corporate loan involves selling an invoice or a bill of exchange to a lending institution at a discounted rate before its due date. It helps you to get immediate cash for their sales without waiting for the payment from their customers. 

Depending on whether the seller or the buyer bears the risk of non-payment, bill discounting can be with or without recourse.

5. Overdraft Loan

This type of corporate credit loan enables your business to withdraw more money than the available balance in your business's current account up to a specified limit. This facility helps you meet your short-term cash requirements and handle emergencies without impacting your regular transactions. Depending on the lender's policy, the overdraft facility can be asset-backed or unsecured. 

5. Equipment Finance 

This corporate credit product can help you buy costly new or second-hand business plants or machinery. The purchased machinery itself serves as collateral under equipment finance. 

6. Loans Under Government Schemes

There are various government schemes that provide loans to businesses at subsidised rates and with easy eligibility criteria. Some of these schemes are:

• Pradhan Mantri Mudra Yojana
• Stand-Up India Scheme
• Credit Guarantee Fund Trust for MSE 
• Co-Lending Model (CLM)

7. Point-of-Sale (POS) Loans

POS loans are instant loans that banks and NBFCs offer at the point of sale of a product or service, such as online shopping, travel booking, education fees, etc. POS loans help you to buy products or services on credit without using your credit cards or savings. 

You must repay this corporate credit loan in equal monthly instalments with interest over a specified period.

8. Channel Finance

This corporate loan is a financial arrangement that helps businesses and suppliers work together more smoothly. Channel finance loans help by having a lending institution pay suppliers on your behalf when they deliver raw materials. Later, you repay the bank after selling products to retailers, maintaining a smooth supply chain.

9. GST Corporate Loan

The GST corporate loan is unique because it does not require you to provide any collateral (like property or assets) for security. Instead, the loan amount you get relies on the information from your Goods and Services Tax (GST) returns.

You can only access this corporate loan if your firm has GST registration. 

10. Vendor Financing

Vendor financing, also known as seller financing or owner financing, is a type of corporate loan in which the seller of a property or asset allows you, as a corporate buyer, to purchase goods from them by paying a minimal amount upfront.  

In other words, the seller effectively acts as the lender, allowing you to make instalment payments directly to them instead of obtaining a traditional loan from a financial institution.

11. Loan Against Commercial Real Estate

This is a corporate loan available against commercial property like office space, factory, hotel, etc. The lender evaluates the property's value and offers a loan amount based on it. If you default on outstanding dues, the lender may take possession of the property. This loan typically offers a higher funding amount and lower lending rates

12. Equity Financing

This type of indirect corporate loan is prevalent among start-ups. It is when you sell your company's shares to investors willing to invest in your business idea. In return, they get a percentage of ownership and profits of your company. The advantage of equity financing is that you do not have to repay the money or pay interest.

13. Crowdfunding

This is a type of corporate lending where you raise funds from various people interested in your product or service. You can do this through online platforms where you showcase your business idea, set a funding goal and deadline, and offer rewards or incentives to your backers. Crowdfunding can be either reward-based, donation-based, or equity-based.

Eligibility Criteria for Corporate Loans

The eligibility criteria for various corporate credit products differ. Here is a general guideline to assist you in understanding what you need to qualify for these loans:

• Applicant's Age: Most lenders consider you eligible for a business loan if you are 21-65 years old. They view this age range as suitable for borrowing, representing individuals in their working years, and ensuring they can repay the loan during their productive and earning phase.

• Business Type: The business must be a legal entity, such as a Limited Liability Partnership (LLP), Partnership Firm, or Private Limited Company, to be eligible for a corporate loan, such as an MSME loan.

• Vintage of Business: Lenders usually require the business to have a minimum operational history, which may vary from one lender to another. Typically, companies with at least 3 years of operation are preferable.

• Revenue and Profitability: Lenders consider the business's annual revenue and profitability to ensure it generates sufficient income to repay a corporate loan. If you are operating on a large scale, annual revenue of Rs 1 crore is necessary. However, with some lenders, annual revenue of Rs 10 lakhs or less could also work.

• Banking: Lenders typically review at least six months of your company's current account bank statements before approving a loan. During this process, the lender investigates your's and your company's financial stability and assesses the repayment history of past loans.

Documents Required for Corporate Loans

Some of the most common documents you will need to get corporate loan approval are as follows:

• Business Registration Documents: Certificate of Incorporation, Memorandum of Association (MOA), Articles of Association (AOA), and Partnership Deed, depending on the type of business entity.

• Financial Statements: Audited Profit and Loss (P&L) Statements, Cash Flow Records, and Balance Sheets for the past two years to assess the financial health of your business.

• Tax Returns: Last two years' income tax returns filed by the business, partners, or directors, as applicable.

• Business Plan: A detailed plan outlining the purpose of the corporate loan, how you will utilise the funds, and the projected outcomes.

• KYC Documents: Know your Customer (KYC) documents of the business owners, directors, or partners, including an Aadhaar card, PAN card, and passport-sized photographs.

• Proof of Address: Documents establishing the business's registered address, such as utility bills, lease agreements, or property papers.

• Loan Application Form: The duly filled and signed application form provided by the lender.

• Board Resolution: A resolution passed by the company's board authorising the borrowing of the loan.
• Collateral Documents: If applicable, documents related to the collateral offered for the loan, such as property deeds or asset ownership papers.

Corporate Loan Application Process

Applying for a corporate credit loan is a straightforward process. Follow these simple steps to apply:

• Gather the Documents: Collect all the required documents, such as business registration papers, financial statements, bank statements, tax returns, and KYC documents.

• Loan Purpose and Amount: Determine the purpose of the loan and the amount you need to borrow based on your business requirements.

• Contact Lender's executive: Get in touch with the representative of your selected lender and express your interest in applying for a corporate loan. Inquire about the application process and any specific requirements.

• Submit the Application Form: Fill out the corporate loan application form provided by the lender with accurate details and attach the necessary documents.

• Wait for Approval: The lending institution will review your documents and creditworthiness once you apply. Wait for their decision on loan approval.

• Loan Approval and Disbursement: If approved, the lender will notify you of the loan offer. Review the terms and conditions before accepting. After accepting, they will disburse the funds to your business account.

• Repayment: Make sure to repay the loan per the agreed-upon terms to maintain a good relationship with the lender.

Remember, it is essential to communicate openly with the lender and provide all required information to ensure a smooth loan application process.

Corporate Loan Interest Rate

Since corporate loans are sub-classified into multiple products, the interest rate differs for each. At FlexiLoans, we consider the following factors in determining how much extra you may have to pay:

1. Creditworthiness

Lenders assess creditworthiness using a three-digit CIBIL or credit score, reflecting your ability to repay. A higher score means lower risk and lower interest rates.

2. Cash Flow Status

It refers to the amount and frequency of your business's cash inflows and outflows. Positive cash flow means your company has enough cash to meet its operational expenses and debt obligations. It increases the chances of corporate loan approval and lowers the interest rate.

3. Types and Nature of Business

Lenders look at factors like how risky your business is, how much it can grow, how much demand there is for its products or services, and how much competition it faces. If the lender has confidence in your business's success, they can offer lower corporate credit loan interest rates.

4. Loan Amount and Tenure

When you request a larger amount, the interest rate is likely higher because the lender sees it as a riskier loan.

Another aspect is tenure. If you choose a lengthy repayment period, your monthly obligations will be smaller, but you will end up paying more in interest overall.

Corporate Loan Repayment

If you are worried about loan repayments, follow these practical tips:

• Create a Budget: Develop a comprehensive budget that outlines your business's income and expenses. Identify areas where you can cut costs and allocate more funds towards loan repayment.

• Prioritise Payments: Make loan repayments a top priority. Allocate surplus funds towards the loan rather than spending them elsewhere.

• Avoid Missed Payments: Missing payments can lead to penalties and prolong the corporate loan term. Set reminders or use auto-debit to ensure timely repayments.

• Use Windfalls Wisely: Consider using a portion to pay off the loan if your business receives unexpected income or windfalls. It accelerates debt reduction.

• Refinance or Consolidate: If feasible, explore refinancing options to secure a lower interest rate or consolidate multiple loans into one, simplifying repayment.

Avoid New Debt: Refrain from taking on new corporate loans unless necessary. Focus on repaying the existing loan first.

Conclusion

Corporate loans are an essential funding source for businesses of all sizes and sectors. They help your company to meet its financial needs and achieve its goals. However, before applying for one, it is advisable to compare the different types of loans available in the market, their features, benefits, drawbacks, eligibility criteria, interest rates, charges, etc., and choose the one that suits your business’s requirements and capacity. Visit the FlexiLoans website to know more about corporate credit products.

Frequently asked questions