What are Business Loans?

We all know about the Business loan, it’s the one which provides funds for your Business, which gives financial support & help to your business and the opportunity to grow and scale.

The funds from a business loan can be used for any purpose as per your business requirement. Be it the to maintain the cash flow for your business or to purchase machinery or inventory, whether it be purchasing land to set up your extended factory or outlet or to pay your working staff. Funds from the business loan can be used for any of these things.

However, it is not so easy to qualify for a business loan, you have to fulfill the required eligibility criteria of your lender in terms of business stability, business potential, your personal and business credit history and so on.

But that’s not enough, the lender charges some particular rate of interest against your borrowing which is on a yearly basis. The interest is required to be paid along with your monthly EMI so that it doesn’t become a burden for you.

The amount of loan which you will get approved for also depends on the collateral you provide, you can also use Credit Guarantee Scheme by the Government to avail a higher loan amount. The amount which you will as a business loan also depends on the Model of your business and on the current financial status of your business.

In order to be successful in a business, there are few tips:

  • Have a proper business plan.
  • Define your priorities (which requirement is urgent and which can be postponed for further) in terms to use the money.
  • It is advised to go for a business loan for small amount which will be needed for a month or a year.
  • Have stepwise planning.
  • Borrowing more at a time will increase the burden of EMI on you from day one.
  • If you borrow for a small amount you will be paying less on your EMIs and can take top-up loans when required again.

There are a number of Banks and Fintechs offering Business loans for SMEs, though they too have some eligibility criteria to fulfil there are certain Tax benefits involved for a business loan.

Interest Tax Deduction on the Business Loan

  • Do you know? The interest which you pay on your business loan is tax deductible.
  • However, in order to avail the deduction on the interest paid towards your business loan, you need to satisfy some criteria. Apart from this type of loan you owe also impacts how much is tax deductible from your interest.
  • The interest which is paid towards the business loan is generally deductible from the gross income.
  • The sum borrowed as the business loan is not considered as your income.
  • However, it is important to know that the principal repayment amount is not tax deductible in any case.
  • The interest paid on the business loan is deductible from tax.
  • This helps you to reduce the total tax to be paid for the company as well.
  • The Principal repayment amount is simply paying back the money which was borrowed as the business loan (which was not considered as your income for the business). This is the reason this amount is not tax deductible.

It may seem complicated for you, let’s understand this with an example.

Suppose you’re an owner of a small business, and you have taken a business loan to grow your business. In this case, repaying off the business loan becomes a reason to worry as you have to repay the borrowed amount along with the interest rate.

You will feel somewhat relaxed to know that the interest on your business loan is tax deductible.

With a business loan, helps you to grow your business by providing you financial support. The interest paid towards the business loan repayment is considered as a business expense, and hence the interest on your business loans are tax deductible.