Types And Details About Corporate Loans

Guest post by Ashish Gupta

Corporate loans are loans that are taken for the purpose of business. There are many banks which provide corporate loans.  However, the eligibility criteria and the upper limit for the sanction of such loans would differ.  The loans are generally sanctioned for those businesses that have been in existence for at least 5 years and have been making profits for a period of at least 2 years before making such an application for the loan.  The funds of the loan when sanctioned can be used for long term as well as short term business expenses.

Corporate loans can be either secured or unsecured loans.  Secured corporate loans require collateral like business assets, for the sanction of the loan, and such collateral can be seized in case of non payment of principal or interest amount depending on the contract between the lender and the borrower.  On the other hand, unsecured corporate loans are those that do not require any collateral as such.  However, unsecured loans can be obtained only if the borrower has a good credit score.

Types of Corporate Loans

There are various types of corporate loans offered to be lent by financial institutions.  Few of them are:

1. Term loan is a loan that can be secured for the purposes of buying property for business, or for buying new equipment with better technological advancement.
2. Loans against securities are those where the borrower can obtain a loan by pledging securities like mutual funds, bonds, insurance policies, and any other securities of similar nature.
3. Letter of Credit Facility and Bank Guarantee is when the bank acts as a surety for transactions made by the concerned person for business purposes.
4. Cash Credit Facility is wherein the borrower can avail up to 70% to 80% of the value of assets that he/she pledges for business needs.
5. Overdraft Facility is an offer by the bank to debit your current account beyond the money that is present in there. Such a facility is generally provided according to the assets pledged by the borrower.
6. Channel Financing helps the distributors in obtaining the funding required for buying new equipment, tools and other items.
7. Working Capital GST Corporate loans help in attaining quick cash on the basis of the applicant’s GST returns and also eliminates some cumbersome paperwork.
8. Drop-line overdraft facility is where the lender deposits certain money in a separate account for the borrower, from which the latter can utilise business expenses.  The speciality of this kind of loan is that the borrower only needs to pay interest up to the amount of loan that has been used by him/her from the money deposited in the account.

ELIGIBILITY CRITERIA

The eligibility criteria for each financial or lending institution may vary according to their policies and rules.  However, few of the basic requirements that are necessitated by almost all lending institutions for availing a corporate loan are as follows:

1. AGE: The applicant must at least be 21 years old, but less than 65 years.
2. INCOME: The expected annual income of the applicant is generally Rs.1, 00, 00,000. However, some financial institutions may provide loans for a slightly lower income level as well.
3. INCOME TAX RETURN: The income tax return for at least one year must be filed before applying for such a loan. Some lenders may even expect the applicant to have filed income tax returns for two years before applying for the loan.
4. PROFIT: Most lenders require that the business must have made profits for at least 2 years before submitting the application for a corporate loan.
5. CREDIT RATING: The applicant must have good credit ratings and credit score before making an application for a corporate loan, especially for those who wish to obtain unsecured loans.
6. STABILITY: The history of the business is also looked into by financial institutions to know the stability and growth of the business. 

Documents Required

The documents required may also be subjective depending upon the lender.  However, few documents are fundamental that all lending institutions would need when an application for a corporate loan is submitted. They are:

1. Permanent Account Number card, or the PAN card
2. Identity proof
3. Address proof
4. Bank Statements for the past 6 months of one years
5. Continuance proof of the business
6. The latest Income Tax Returns which have been filed
7. Other Documents like the certified copies of Memorandum of Association and Articles of Association of the company, or a declaration of sole proprietorship or partnership deed.

Things to consider before applying for a corporate loan

1. CREDIT SCORE: The applicant must check his/her credit score before applying for such a loan, as credit scores would drastically affect the availability of a loan.
2. INTEREST RATE: It is important to analyse the interest rates of each bank to ensure that more of the profits in business do not end up getting spent for interests.
3. TENURE: The tenure of the loan is another important aspect that needs to be considered and analysed for the benefit of the applicant’s business.  If the applicant knows that more profits can be made quickly, then he/she must opt for a shorter term of repayment of loan.  On the other hand, if the applicant is aware that the business might not make profits immediately, then it is better to opt for a long-term loan.
4. FILING INCOME TAX RETURNS:  The applicant must ensure that the ITR has been filed for at least 1 or 2 years before applying for a corporate loan.
5. OTHER ALTERNATIVES: The applicant must consider other feasible alternatives than loans while in need of funds for business. For instance, if the business is a registered company, then alternatives such as shares, and debentures must also be considered.

Term of repayment for corporate loans

The term for repaying corporate loans depends on the contract between the lender and the borrower, and the kind of loan that has been secured by the borrower.  The repayment period of some corporate loans may be about 12-48 months, or it can even extend up to 5 years.