Choosing the right loan - IV: Business

Businesses are usually treated as a separate category by lenders, since the earning capabilities of a business are vastly different from that of an individual. However, many self-employed professionals and individuals qualify their practice as a business, and some of the loans available in this category, such as equipment loans can span all three categories of borrowers. In this fourth part of the series on choosing the right type of loan, we look at the options available for businesspersons to avail loans.

Secured Loans

Most businesses use secured loans for making capital investments into the operations and expansion of the company or firm. Secured loans are available for a variety of reasons including purchase of land for office/factory, construction, etc. Usually these loans are payable over a longer tenure and can be customized for various modes of repayment - bullet, balloon, step-up, etc. For businesses, secured loans are easier to obtain and come at lower interest rates as they are backed by an asset. Loans are available for a significant portion of the value of the asset, at times as much as 100% of the value is covered by the loan. Some of the more common forms of secured loans that businesses and business owners can avail of include:

1. Equipment / Vehicle / Commercial Vehicle Loans: Since these equipment are mostly used in the business operations, funding them is fairly easy for a lender. In case of certain types of equipment such as those for a hospital, a moratorium on the loan is also available, i.e. a transit period during which no instalments are paid, in order to allow the business to grow and build up the business. However, interest is calculated and added to the due amount during this period. Existing equipment can also be refinanced under this category of loans.
2. Gold Loan: This is one of the safest and easiest ways to get a secured loan for an individual businessperson. Since gold has an intrinsic value, processing a gold loan can be done in a matter of hours as compared to the time taken for other loans. During the tenure of the loan, the lender retains possession of the gold as a security. The same is returned to the borrower on repayment of the loan.
3. Loan against Shares / Mutual Funds / Insurance / Bonds: Publicly traded stocks, bonds and savings certificates which we have invested in, as well as insurance policies can be used as collateral for borrowing funds from lenders. Terms vary greatly, and depending on the risk appetite of the lender, 20% to 80% of the asset value can be taken in the form of a loan.

Unsecured Loans

For a business that does not have substantial assets such as a service business, early stage loans through unsecured channels can be difficult to obtain. However, a number of loan categories do exist which help the directors/founders of businesses can get access to funds for the growth of their business or for personal needs.

1. Business Loans: Any business that is in operation for a reasonable period of time has a credit limit in the form of Bank Guarantee, Cash Credit, Overdraft facility, etc. Business loans can be availed from a variety of lenders, but terms vary greatly from one lender to the next. With a good credit score and track record of payments, these loans make it possible for businesses to expand. Interest rates and criteria can depend on a variety of factors such as the age of the company, the assets, turnover, credit score of the promoters, purpose of the loan, etc. Businesses that have steady growth and a good track record of repayment on earlier debts are more likely to get unsecured loans on attractive terms.
2. Personal Loans: Based on the income statements and IT returns of the promoter, lenders extend personal loans to businesspersons for a variety of reasons. Factors here include creditworthiness of the individual, track record of repayment of both individual and company, assets in the name of the owner/promoter, etc. Personal loans are taken for a variety of reasons such as health issues– health issues, household renovation, etc.

“Growing and maintaining a business requires capital and a steady cash flow. Managing that cash flow is key to growing a business,” says Sathya Ramanan, Business Head – South at HDB Financial Services. “Thankfully, a number of secured and unsecured loan options make it possible for businesses to maintain a cash flow through uncertainty by borrowing based on their requirements.”

In the final part of this series on loans, we bring together the various aspects discussed in the earlier parts, and map how different kinds of loans can help different types of borrowers.