Business loan guides

There is also the question of security that is provided by a borrower when a term loan is taken. This has to be done in several layers in order to satisfy the banks that there is enough backup for them in case the borrower fails to repay the loan.

In the first instance, there has to be a hypothecation of the current assets of the business with the bank. This will include items like stock and other current assets. It will have to be accompanied by the hypothecation of the fixed assets that include buildings, land and other similar assets actually owned by the business.

Once the loan crosses a certain minimum figure, which can be in the range of Rs. 5 lakh-Rs. 7 lakh, it requires collateral. Collaterals are specific assets to be pledged by the borrower and will yield some amount for the lender in terms of recovery of the loan if required. There will also have to be a personal guarantee and, if required, a third party guarantee, depending upon the amount of the loan and the terms and conditions involved.

Term loan is a special type of loan and hence its repayment has an added importance. There are specific purposes for which the loan has been taken and thus there is no common way in which the loan repayment will be fixed. In most cases, the repayment has to be done in instalments with an allocation between capital and interest that is decided as per the working and time period for the purpose of the loan.

The repayment instalment can be either monthly or quarterly but the main factor that will determine this position is the cash cycle of the business. Every business has a unique cash cycle in the manner of the turnover and the way in which its debtors and creditors make the payments. This determines the cash flow for the business. If it is a regular business or trading activity then there will be a monthly cash flow but if it is seasonal or there is a specific time when the amount is received then the cash flow could vary. The latter case will require a separate type of repayment schedule and all the details will be fixed after taking these conditions into consideration. This makes the repayment procedure also easier.

There are various purposes for which a bank will provide a term loan. There is a list of reasons why this is done and the borrower has to ensure that the reason that they seek a loan for is one of it. Some of the common reasons listed by the banks include:

* To help retire high cost debt for a business
* To provide an impetus to the research and development activities within an entity
* To shore up the net worth of a business
* To build assets for a business
* To help grow a business through strategic investments
* To strengthen the asset base

Term loans are one of the most common routes used by entities to raise funds. These funds are then used for the business in various ways. One big area of lending in case of term loans is the loans given to small-scale enterprises and businesses that are typically run by individuals or even firms and companies. Term loans form a significant part of the lending process of an entity and this is the reason why it requires attention.

What distinguishes term loans from other borrowings is its tenure. Various other loan options available are short term where the time period is usually around a year and has to be renewed thereafter. But term loans have slightly longer time period. It is common to find term loans for a period of 3 years. This is the time frame that will help a business to make proper use of the funds made available.

There are a wide variety of securities that banks will accept to sanction the overdraft facility. One point is that the securities and the details of applicability will vary across banks, depending upon what each bank has decided. Also, each borrower has to carefully look at what is applicable to them [...]

In the overdraft facility, the amount is not fixed for specific categories of business. The figure is different for each case, depending upon the financial position of an entity and the funds it requires. This is again a short-term facility, so the conditions will keep on changing, resulting in a [...]

Taking a loan every time there is a requirement of funds is not an easy task as far as any business is concerned. This calls for the presence of some security which on being deposited with the bank, will the funds be made available for the business. Instead of looking for loans and expecting to raise money in this manner, there is a better way for dealing with this kind of situation. Here, an investor can earn returns on his/her investment just like a normal investment and at the same time use this investment as a means to raise funds that can be used for the business.

An overdraft facility calls for using some investment of the borrower as a security and then providing a facility to borrow against this amount. There is a specific amount that is allowed as the borrowing. The security earns the normal rate of return for the investor and at the same time provides additional finance facility. The good part of the entire exercise is that the borrowers will pay interest only for the time period for which they have borrowed the amount and that too for the specific amount for which they have overdrawn the account.

The need for documentation can be broken into two parts for the entire cash credit process. The first is the requirements for the opening of the account and the second which refers to the security that will have to be provided in support of the entire borrowing.

The opening of a cash credit account will require the necessary information like the details of the entity or the business, documentation like the partnership deed or the articles of association, the permanent account number (PAN) and so on. These are likely to be the common requirements that arise while opening a bank account. Though

Cash credit is a short-term facility and it operates in a manner different than that of various other loans. The usual experience of a person availing credit facility is that a bank gives a fixed amount on which a fixed rate of interest is charged. There are conditions with regards to the repayment of the loan and hence the schedule has to be maintained. But the situation is completely different when it comes to a cash credit.

Cash credit comes with a limit. Cash credit limit is sanctioned for a specific period of time, usually a year. The entity to which the limit has been sanctioned can use the cash credit at any point during the time period and the specified rate of interest will be charged on the amount that is taken or used. The account which is called cash credit account can be operated like any other account. It means withdrawing money when there is a need and then putting back or depositing the amount when the specific figure is available.

There are various types of requirements for funds as far as businesses are concerned. This is true of all types of activities, be it a business conducted by a company or some activity undertaken by a proprietor. One such requirement is of short-term funds usually known as working capital requirements.

Any business activity is not conducted solely in cash but it also requires credit facilities . This means that every purchase or sale does not result in immediate payment, rather in most cases the cash will come after some point of time. Sales on credit will result in debtors while other receivables will give rise to an asset that will be received in the future. Similarly, when a purchase is made there will be creditors, and there might be some payments that a business has to make which will result in an outstanding. This along with the amount locked in stock and raw materials will make up the working capital requirement for a business.