How to Secure a Business Loan: A Complete Guide

Securing adequate business financing is pivotal for business growth and sustainability. One viable option is a secured business loan, where borrowers pledge assets as collateral to obtain funds. In this article, we underline the details of secured business loans, covering eligibility criteria, benefits, application process, EMI calculations, key considerations, and common queries.

What are Secured Business Loans?

A secured business loan is a financing facility where the borrower provides tangible assets — such as property, equipment, or inventory — as collateral to the lender. This collateral mitigates the lender's risk, often resulting in more favourable terms for the borrower, including lower interest rates and higher loan amounts. These loans are instrumental for various business purposes, including expansion, working capital augmentation, and asset acquisition.

Eligibility criteria and documentation required for Secured Business Loans

Before applying for a small business loan, it's essential to understand the eligibility requirements and necessary documents required.

Eligibility Criteria:

• Age: Applicants should be between 21 and 70 years old.
• Residency: Must be an Indian resident.
• Business Covered: Shopkeepers, wholesalers, retailers, micro and small manufacturing firms, and self-employed professionals are eligible.
• Credit Score: A satisfactory credit score, often above 660, enhances approval prospects.
• Income Stability: Demonstrable stable income or revenue streams.

Required Documentation:

• Identity Proof: Aadhaar card, PAN card, passport, etc.
• Address Proof: Utility bills, rental agreements, or property documents.
• Business Proof: Registration certificates, GST filings, or trade licences.
• Financial Documents: Recent balance sheets, profit and loss statements, bank statements, and income tax returns.
• Collateral Documents: Title deeds or ownership documents of the asset pledged.

Ensuring the accuracy and completeness of these documents can expedite the loan approval process.

Benefits and features of Secured Business Loans

Secured business loans offer several advantages:

• Lower Interest Rates: Due to the collateral provided, lenders often offer reduced interest rates compared to unsecured loans.
• Higher Loan Amounts: The value of the collateral allows for access to more substantial funding.
• Flexible Repayment Tenure: Borrowers can choose repayment periods that align with their cash flow, typically extending up to 12 years.
• Diverse End-Use: Funds can be utilised for various business needs, including expansion, inventory purchase, or debt consolidation.
• Improved Creditworthiness: Timely repayment of a secured loan can enhance the business' credit score.

Application process of Secured Business Loans

Applying for a secured loan involves several steps:

1. Assess Financial Needs: Determine the exact funding requirement and the purpose of the loan.
2. Evaluate Collateral: Identify suitable assets to pledge and ascertain their market value.
3. Research Lenders: Compare offerings from various financial institutions, focusing on interest rates, terms, and processing fees.
4. Prepare Documentation: Gather all the necessary documents as outlined in the eligibility section.
5. Submit Application: Complete the lender's application form accurately and submit it along with the required documents.
6. Undergo Verification: The lender will verify the provided information and assess the collateral's value.
7. Loan Sanction and Disbursement: Upon approval, the loan is sanctioned, and funds are disbursed to the borrower's account.

Maintaining transparency and prompt communication with the lender can facilitate a smoother application process.

EMI Calculator

An EMI calculator is a valuable tool that helps borrowers estimate their monthly repayment obligations. By inputting the loan amount, interest rate, and tenure, borrowers can determine an EMI that aligns with their financial capacity. Utilising an EMI calculator aids in effective budgeting and ensures that the repayment schedule is manageable.

Key considerations and tips

Before proceeding with a secured business loan, consider the following:

1. Collateral Valuation: Ensure the pledged asset's value is sufficient to cover the loan amount.
2. Interest Rate Type: Decide between fixed and floating interest rates based on market conditions and risk tolerance.
3. Prepayment Terms: Understand any penalties associated with early repayment or foreclosure.
4. Processing Fees: Lenders usually charge a one-time upfront processing fee and its minimal prepayment charges. For instance, IIFL Home Loans charges 2% of the approved loan amount, which can impact the overall loan cost.
5. Insurance: Insuring the collateral can protect against unforeseen events affecting its value.

It's important to go through the loan agreement and seek clarification on any ambiguous terms to prevent future disputes.

Final Takeaway

A secured business loan is more than just a financing option — it’s a strategic tool that helps businesses unlock capital while utilising their existing assets. Whether you're expanding operations, purchasing equipment, or improving cash flow, understanding the eligibility criteria, loan benefits, and repayment structure is essential.

Careful planning ensures that the loan aligns with your business goals without straining finances. IIFL Home Loans provides secure business loans along with expert advice at competitive interest rates. Start your small business journey with us!