Ultimate Guide to Getting a Small Business Loan in India 2024

Apr 25th 2024
Loan
small business loan in india

Small business loans are a great option for entrepreneurs looking to invest in their businesses. They offer quick access to capital with fewer requirements, making it easier for small and medium businesses to get the funding they need. These loans are designed to cater to urgent business needs, providing the necessary financial support to help businesses grow and succeed. The streamlined application process and minimal documentation make small business loans a convenient choice for entrepreneurs in need of quick funding. 

Assessing the suitability of a small business loan for your company is crucial, particularly during the initial phases of development. 

First, let’s grasp the distinction between a small business loan and other types of business loans. 

How Do You Define a Small Business Loan?

A small business loan is designed for small and medium-sized enterprises to obtain funding. Banks and online lenders provide these loans to help entrepreneurs cover expenses like operational costs, expansion, equipment purchases or restocking inventory. These loans have specific characteristics including loan amount, interest rates, repayment terms and eligibility criteria. 

Reasons Behind Loan Requirements for Small Businesses

Some unquestionable reasons as to why small businesses might have loan requirements have been discussed in this section. 

  1. To Start a Business: There are numerous reasons to consider obtaining a business loan, with one of the most common being to launch a new business. While this is undoubtedly an exciting endeavour, it can also be daunting, particularly if you are uncertain about how to proceed. 
  2. To Expand a Business: Expanding a business often requires financial support and a business loan can be a helpful way to fund growth initiatives such as opening a new location or increasing existing space. It is important to explore the various loan options available to find the best fit for your company’s expansion goals. Small businesses often benefit from SBA-backed loans due to their competitive rates and flexible repayment terms. 
  3. To Buy Equipment or Inventory: Businesses often take out loans to purchase equipment or inventory. These loans can be secured by the assets being purchased or based on outstanding invoices. It is important to consider the affordability of monthly payments and ensure the value of the equipment or inventory is worth the loan amount.  
  4. To Pay Off Debt: Debt is a common reason for business loans. There are different ways to use a loan to pay off debt like consolidating debts for one monthly payment, getting a cash advance on credit cards with high-interest rates, using a home equity loan or refinancing a mortgage. While using a business loan for debt payment, compare rates and terms and understand all the fees before signing. 
  5. To Finance a Business Acquisition: Small businesses often take out loans for business acquisitions. This can be done through debt financing, using a loan to cover the purchase cost or through equity financing (selling shares to raise funds). Working with an experienced loan officer and considering SBA loans can help secure favourable terms. 
  6. To Fund a Marketing Campaign: Marketing is important for any business but it can be costly. There are different methods like advertising, PR, social media and SEO, each with its own costs. A business loan can help cover the marketing budget. 
  7. To Cover Unexpected Expenses: Considering unexpected expenses is a common reason for seeking a business loan, as it can help keep the business operations running smoothly in times of need. It is important to carefully estimate the required funds and ensure that the repayment is affordable. Additionally, comparing interest rates and researching different lenders is crucial in making an informed decision. 

 

What are the Loan Options Available for Small Business Owners?

There is a wide range of loan options available for small business owners in India, depending on their specific needs and qualifications. Here is a breakdown of some of the most common loan options available for small business owners. 

Loan Scheme Type

Loan Name

Details

Government

Pradhan Mantri Mudra Yojana (PMMY)

This micro-loan scheme is designed to support small businesses and is categorized into Shishu, Kishor and Tarun based on loan amounts. These loans are popular for their low interest rates and relaxed eligibility criteria

Stand-Up India

This scheme targets specific groups like women entrepreneurs and SC/ST communities to encourage entrepreneurship. It enables them to obtain bank loans ranging from 10 lakh rupees to 1 crore rupees for the establishment of new businesses

MSME Business Loan in 59 Minutes

This scheme facilitates the quick processing of business loans for MSMEs by the public sector banks, ensuring speedy access to funding for small and medium enterprises

Bank Credit Facilitation Scheme

The NSIC-led scheme aims to fulfil the credit requirements of MSME units in collaboration with multiple banks. The scheme offers repayment periods ranging from 5 to 7 years and in exceptional circumstances, it can be extended up to 11 years

Credit Guarantee Scheme (CGS)

The loan is available for service or manufacturing MSMEs but not for educational institutions, agriculture, retail trade or SHGs (Self-Help Groups)

Sustainable Finance Scheme

The scheme, led by SIDBI (Small Industries Development Bank of India), provides loans to industries involved in green energy, renewable energy, technology hardware and non-renewable energy. It was initiated by the government to support the entire value chain of cleaner production, energy efficiency and sustainable development projects

Others

Term Loans

Traditional loans are a popular choice due to their fixed repayment schedule and interest rate, which allows for better budgeting and planning. Whether your needs require a short-term or long-term solution, traditional loans can be tailored to fit your specific situation 

Working Capital Loans

These loans are specifically tailored to help finance the regular operational costs of your business, such as purchasing inventory or covering employee payroll. They are meant to provide the necessary funding to keep your business running smoothly on a day-to-day basis

Line of Credit

It is a convenient way to manage cash flow and make purchases without having to use your funds. However, it is important to use it responsibly to avoid accumulating high interest charges and potential debt. Keep track of your spending and payments to ensure it benefits your business without causing financial strain

Equipment Loan/Machinery Loan

These loans are designed to exclusively fund the procurement of equipment or machinery for your business

 

 

Procedure to Apply for a Small Business Loan and Get Approval

The simple steps through which you can apply for a small business loan and get approval from the lender are discussed below - 

  • Check If You Qualify: Make sure to carefully review the requirements for the small business loan before you apply online. This will help ensure that your application meets all the necessary criteria and reduces the risk of being rejected at a later stage
  • Apply and Submit Documents: Complete and submit the application form for a business loan. The dedicated team of the lending institution will contact you to proceed with the processing of your application
  • Await Loan Approval: Once you meet the eligibility criteria, you will need to provide the required business loan documents. Following verification of your documents per the lender’s credit policy, your loan application will be approved and the funds will then be transferred to your registered bank account

Which Documents I Have to Submit to Apply for a Small Business Loan?

To apply for a small business loan, you must furnish the following documents: 

  1. Valid ID proof like driving license, passport, voter ID card, aadhaar card or PAN card is required for a small business loan application
  2. You must provide their current residential address proof such as driving license, aadhaar card, ration card, electricity/telephone bills (of last 3 months) or passport
  3. When applying for a small business loan, provide proof of business address, lease agreement, GST registration and recent bills (last 3 months) under the business’s name
  4. To get a small business loan, you must show proof of business income like income tax returns, profit/loss accounts, balance sheets, PAN card, GST returns and bank statements (of the last 6 months)
  5. You have to furnish business registration evidence which includes partnership deeds, MoA, AoA, licenses, rent agreements and sales deed
  6. You have to furnish crucial documents for small business loans like a business plan outlining the industry, growth prospects and viability of the business
*Note: The documents listed above have been outsourced from various trustworthy sources on the internet. Kindly speak to your lender regarding the documents they need to grant you a small business loan.

 

5 Tips To Get A Preapproved Small Business Loan

 

1. Maintain a Good Credit Score

Your CIBIL or credit score, which represents your creditworthiness and financial stability and indicates how likely you are to repay the loan, is one of the first things lenders look at. An overall favourable score for getting a pre-approved loan and making it more affordable is one over 685. Keep your credit utilization below 30% of your credit limit, refrain from applying for many loans at once, make on-time payments on your current obligations, and avoid defaults if you want to keep your credit score high.

2. Have Excellent Financial Stability

Lenders base their decision to lend on your past credit history and capacity to manage debt responsibly. Incorporate previous and present financial accounts, tax returns, and audited reports to provide a transparent and thorough financial history of your company. Your case for a pre-approved company loan will be strengthened if you can show steady revenue growth and positive cash flow.

3. Maintain All Financial Documents

Keeping current financial records is essential for the loan approval procedure. Make certain that any bank or financial statements and other documentation are current and ready for review by lenders. Quick access to updated documents demonstrates your dedication to accountability and openness, which will increase your trust as a borrower.

4. Pick an Appropriate Lender

Making the appropriate lender choice might have a big influence on your ability to get a pre-approved business loan. Loan products and eligibility requirements differ between lenders. Find out about and contrast the products that different financial organizations, such as banks, non-banking financial firms (NBFCs), and internet lenders, have to offer. Select a lender whose loan offerings fit your company's demands and whose conditions are in your best interest.

5. Have an Excellent Debt-To-Income Ratio

The financial institution will consider your capacity to repay the loan using several factors, including your debt-to-income ratio. It compares your monthly income to your entire monthly debt commitments. Keep your DTI ratio under 40% to improve your chances of getting a pre-approved business loan. Lowering your DTI ratio and increasing your eligibility can be achieved by paying off or combining your loans.

The Conclusion

Select Investkraft if you need to finance your company's operations rapidly. We provide speedy processing, flexible payback terms, and structured EMI plans for our cheap loans for the company.

Using our business loan EMI calculator, you may estimate your prospective monthly payments and the interest you'll have to pay before applying for the loan. This makes it easier for you to budget your EMIs, manage your other costs, and repay the loan smoothly.

FAQs

 

Q: To apply for a business loan from Investkraft, should I need to provide collateral?

A: No assets must be pledged as security to get a company loan from Investkraft.

Q: How can I determine my business loan EMI in advance?

A: You may estimate the EMI for your business loan using the Investkraft calculator based on the needed amount and term.

Q: I have a fantastic business idea, but my company is just starting.  Can I still qualify for a small business loan?

A: Yes, startups can get loans by showing a strong business plan and realistic financial projections detailing the target market, competitive advantage, marketing strategy and how the loan funds will be used. Solid financial projections build confidence in loan repayment.

Q: My credit score isn't the best. Does this automatically disqualify me from getting a loan?

A: No, lenders consider more than just a good credit score. A well-crafted business plan, strong financial projections, responsible financial management and a plan to improve your credit score can help offset a less-than-ideal credit score. Look for lenders who work with borrowers in different credit situations. 

Q: What are some alternatives to traditional small business loans if I don't qualify or prefer a different option?

A: Consider the following alternatives:

  • Bootstrapping
  • Crowdfunding
  • Equipment Financing
  • Merchant Cash Advance
  • Angel Investors

Q: What are some red flags to watch out for when choosing a small business lender?

A: Watch out for lenders with:

  • Unrealistic promises of guaranteed approval
  • High upfront fees
  • Pressure to make a quick decision
  • Vague or complex loan terms

Q: How can I build a strong relationship with my lender after securing the loan?

A: Maintaining a positive relationship with your lender benefits is crucial for your financial well-being in the long run. Here are some tips:

  • Make timely loan payments
  • Communicate proactively
  • Maintain good financial records
  • Explore future financing needs

Q: What if my loan application gets rejected? What are my next steps?

A: Here is what you can do if your loan application gets rejected:

  • Seek feedback from the lender
  • Review your application
  • Improve your credit score
  • Consider alternative lenders
  • Refine your business plan

 

 

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