Investing in the expansion or upgrade of your business operations is a good idea when the venture is already making profits. If there is a consistent demand for your products or services and if your calculations show that the results will be better with further inputs, you can look for funds from organised institutions of finance.
A loan for business can help you purchase a new shop or office space, improve the furnishing in your current premises, buy advanced equipment for your work or procure bigger stocks of raw materials or inventory in a season when the prices are low.
Flexibility of getting a loan
The finance industry has grown over the years and digital technology has enabled lending organisations to provide more attractive credit products to their customers. In an age where messages can be exchanged in seconds, phone calls can be instantly made to any part of the world over the Internet protocol and merchandise can be ordered with a few clicks, why visit the brick-and-mortar offices of lenders to apply for a loan?
Financial Technology (FinTech) companies have emerged as the new sources of funds for companies that need business loan. They are working as competitively as banks and have opened digital avenues for faster processing of loan requests.
FinTechs are classified as non-banking finance companies (NBFCs) that leverage big data and advanced analytics to disburse loans in a quick and efficient manner. The loan application process of these lenders is completely digital. The documents necessary to substantiate the information entered in the application are submitted in soft copy formats through the encrypted website of the concerned FinTech company.
If the business fulfils the eligibility criteria for the loan that it needs and all the documents are verified as genuine, the loan application is approved in a matter of minutes and the applicant is informed of the decision on the same day. What follows in the next 2-3 days is the disbursal of funds into the applicant’s business bank account.
Sounds simple? It is indeed a seamless and straightforward process that eliminates all the complex business loan details. A significant benefit of borrowing funds from FinTechs is that these organisations provide unsecured loans. This implies that they do not ask the borrowers to pledge collateral against the amount borrowed.
While the advantages of digitally borrowing from a FinTech company and getting an unsecured loan are now understood by many business borrowers, some of them are still reluctant to apply for the much-needed loan. Why? It may be because they are reluctant to pay the comparatively higher interest that accompanies such loans. Some of them also allege that on an average, FinTechs charge an increased rate of interest than banks and traditional NBFCs. Throughout the tenure of loan repayment, a part of business income gets drained in EMIs. But a closer analysis will reveal that this may not be entirely true.
Income tax benefits of business loans
What most business owners overlook is the fact that like home loans, the interest on a loan for business is also tax deductible. As per Section 43B (d), the interest on borrowings from a financial institution is considered an expense deductible from the gross income of the business.
It should, however, be understood that the interest payment is allowed to be claimed as an expense only in the year in which it has actually been paid and not in the year in which the liability to pay the loan interest was incurred. This implies that if you apply for a business loan towards the end of the Financial Year 2017-18 and start paying your loan EMIs from or after April 2018, the benefit of the deductions can be availed only in the IT returns for the financial Year 2018-19, the Assessment Year for which will be 2019-20.
To know the details of such deductions and the maximum tax benefits available for your business, you can talk to your finance manager and the customer service team of the lending organisation that you borrow from.
It should also be noted that while borrowing from a FinTech, you can make the loan repayments in a bulk amount instead of paying EMIs throughout the determined tenure. Therefore, if you get any sudden proceeds from the sale of a property or profits in business, you can use the same to pay off the entire outstanding debt without incurring any prepayment penalty.
Input Tax Credit on loan processing charges
The Goods and Services Tax (GST) has also provided the benefit of Input Tax Credit (ITC) to business borrowers. As per the GST law, the conditions to avail input tax credit on the supply of goods or services include:
The businessperson must possess the tax bill/debit or credit note/supplementary invoice issued by the supplier who is registered under the GST Act
The goods/services on which the ITC is being claimed have been received
The GST Returns (GSTR-3) for the period has been filed
The GST charged (on the concerned goods or service) has been deposited in the government account by the supplier
According to the provision, “Any registered person can avail a credit of tax paid on the inward supply of goods or services or both which is used or intended to be used in the course or furtherance of business.”
When you get a loan for your business, you pay GST at the rate of 18% on the processing charge, and these are mentioned in your loan issue document. Since the funds will be utilised for improving or expanding a commercial entity, you can claim the tax paid under the GST laws. This is another benefit of such loans. You simply need to ensure that the lender provides a breakdown of the processing charge on your loan and the applicable GST on the same.
A simple cost-benefit analysis will show that the gains from the business loans outweigh the price paid through interest and processing charges. You can invest the borrowed funds for any purpose that helps you run your venture better. Eventually, with the right business strategies, you can earn better returns and make further progress in the industry segment your business belongs to.
