Banks, non-banking financial institutions, or other private lenders have got you covered if you are looking for financing. Firstly, you will have to find out the purpose of the business loan. Based on that, you can decide which loan will be best for you to avail of.
There are two types of business loans. One is a secured business loan where the lender asks for a security or collateral deposit. Securing business loans gives lenders greater assurance of repayment. Borrowers, however, face risks. For example, if you borrow a secured loan and don’t repay it, the asset you have deposited as security could be lost. When you deposit collateral or security for secured business loans, you can get them at nominal interest rates. Furthermore, the terms and conditions of such loans are much more advantageous to the borrower. If your credit score is low or if your lender feels you can’t return the money, they usually don’t release higher amounts or lend at higher rates. The other is an unsecured business loan where there’s no need to deposit any such collateral.
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Who Is Eligible for a Business Loan?
At the time of application, the applicant must be at least 21 years old.
- At the time of the loan’s maturity, an applicant cannot be older than 65 years old.
- It is essential that the applicant’s business has been profitable for at least the past two years.
- Business applicants must have been running their business for at least two years, and they must have at least five years of experience running a business.
Documents Required for Verification of Loan Application
- Identity proof
- PAN card
- Address proof
- Proof of business
- Business and personal bank statements (last six months)
- Business and personal tax return records
- Business’ financial statements
- Business’ legal documents such as commercial lease, and franchise agreement
Tax Benefits of Business Loans
By taking out a business loan in Mumbai, you are able to meet your short-term or long-term financial requirements as well as save on taxes. You are therefore entitled to a number of tax benefits as a result of repaying the loan. Borrowing money for business purposes can result in the following tax deductions:
- Similar to most other kinds of loans, business loans have both a principal and an interest component. Deducting the interest component of your business loan from your gross income can help you reduce your taxes. However, be sure to keep all the records so you can submit them when you repay the loan and file your taxes.
- You are exempt from taxes if you deduct business expenses from your gross revenue or profits. It would be best if you deducted such costs from your gross revenue or profit before estimating your tax liabilities.
Business Loan Exceptions to Tax Benefits
Tax savings are possible for business loans and expenses incurred to keep the business afloat. However, there are numerous instances where such tax reductions are not applicable.
The exceptions you should know before you borrow money:
- You won’t be eligible for tax savings if you pay the interest on the first loan with a second or third loan that you borrowed from the same lender. However, interest accrued on your second or third loan may still qualify for tax benefits.
- Tax deductions apply to the running of another business that you decide to purchase. Otherwise, your business loans won’t qualify for tax benefits.
- Business loans repaid through EMIs are not eligible for tax benefits.
Other Benefits of Business Loans
There are other benefits to borrowing money to set up a business besides tax benefits. For example, depending on the lender, the amount you borrow can serve various business purposes as well as have flexible repayment options. Additionally, borrowing money to start up a business has other benefits, like:
- Business loans can also be customized to suit your requirements.
- The majority of lenders, including some non-banking institutions, provide flexible repayment options for business loans. This makes it easier for you to get reimbursements on the loans.
- If you’re starting a new business or organization, there are several types of business loans that you can take out to save on taxes. Furthermore, startups who borrow certain types of business loans online are entirely exempt from taxes for up to three years.