Business Loan

Short answer: a business loan is money a bank, NBFC, fintech or other lender gives to a business to fund things like working capital, buying equipment, expanding, or bridging cash-flow. You borrow an amount now and pay it back over time with interest and any fees.

Below I’ll explain the main types, the typical lifecycle step-by-step, eligibility & documents, costs you should watch, and practical tips.

how a business loan typically works

Identify the need
- Decide what the loan is for (inventory, payroll, expansion, equipment). Size the amount and preferred tenure.
Choose the right product & lender
- Compare banks, NBFCs, fintechs, and govt schemes for interest, tenure, fees, and speed.
Check eligibility
- Lenders look at business age, turnover, profitability, credit score (business & owner), sector, and documents.
Prepare documents
- Common docs: identity & address proof of owners, business registration, GST/Tax records, bank statements (usually 6–12 months), profit & loss / balance sheet, invoices, and KYC forms. Collateral docs if pledging assets.
Apply
- Submit application online or at branch with documents and requested statements.
Lender does underwriting
- They verify documents, check credit history, run cash-flow analysis, sometimes do site visits. They may ask questions or require additional docs.
Sanction & terms
- If approved, lender issues a sanction letter detailing sanctioned amount, interest rate (fixed or floating), tenure, EMIs or repayment schedule, fees (processing, prepayment), and security/collateral terms.
Sign agreement & disbursement
- Sign loan agreement and provide any required collateral/guarantees. Lender disburses funds (one-time or in tranches).
Repayment
- You repay as agreed: monthly EMI, bullet repayment, or via a rolling facility (for lines of credit). Keep paying on time to avoid penalties and hit a good credit score.
Closure

After full repayment, lender releases any collateral and issues a NOC/closure certificate.

Common types of business loans

Term loan — fixed amount repaid over a set tenure (months/years).
Working capital / cash-credit / overdraft — flexible short-term borrowing against a limit.
Line of credit — like a reusable overdraft; borrow up to a limit, repay, borrow again.
Invoice financing / factoring — sell or borrow against unpaid invoices.
Equipment / machinery loan — for buying assets; asset may be security.
Business credit card — short-term small purchases, revolving credit.
Merchant cash advance — repaid from daily card receipts (higher cost).
Government-backed schemes — subsidised loan programs (varies by country).

When a business loan is a good idea — and when to pause

Good idea: to fund revenue-generating activities (stock to meet demand, equipment that increases capacity, or short cash-flow gaps).
Pause if: the loan will finance non-essential spending, you can’t reasonably forecast repayment, or interest/fees make the project unprofitable.