Business loans are an essential requirement for small business owners. At any stage of the business lifecycle, you may have faced the requirement of funding. Securing funds for a startup is one of the toughest challenges an entrepreneur faces while starting a new business. Here in this article, we list the best small business loans for Indian entrepreneurs for different purposes.
You also must know the advantages and disadvantages of each funding methodology. Such as estimating the number of funds required, the application of funds, the projected financial position of the business including the returns generated, and evolving a strategy.
It is all required to approach and secure the required funds. Apart from angel investors and venture capitalists, banks are one of the largest funders of startups in India. They are providing funding to thousands of startups each year.
In product-based business, two types of loans are mainly required by the owners. One is a term loan to buy equipment and machinery. Another is the working capital loan for stocking inventory. In a service-based industry, the working capital requirement is much higher than in a term loan.
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List 0f 12 Small Business Loans in India
1. PSB MSME Loan
The government of India introduced a quick business loan portal for individuals. The loan is aimed at people looking to expand their existing business. Under this scheme, MSMEs can get loan amounts from Rs. 1 Lakh to Rs. 5 Crore in less than 59 minutes.
The business loan is executed by public and private sector banks and Non-Banking Financial Companies (NBFCs).
2. Credit Guarantee Fund Scheme for Micro and Small Businesses
The CGMSE was first launched in the year 2000. The loan scheme is aimed at funding small and micro-entrepreneurs in starting and running a business venture.
3. Mudra Loans
Micro-units Development and Refinance Agency, popularly known as MUDRA is a nodal organization providing small business loans to micro-entrepreneurs. Mudra Loans are primarily aimed at people who generally do not come under the ambit of secured business loans from reputed banks.
4. Business Loans from NSIC
NSIC offers subsidies to small-scale entrepreneurs. It offers broadly two kinds of financial benefits. One is financing raw material buying and the other is funding marketing needs.
5. Credit Linked Subsidy Loan from CLSS
The CLSS scheme promoted by the government is to enhance product quality and thereby remain competitive in the market. A business owner looking to upgrade its manufacturing setup can avail of this financial subsidy.
6. Business Loan from SIDBI
SIDBI has taken the initiative to fund the manufacturing and service-based industries. Under this initiative, SIDBI facilitates Bank loans for new as well as existing manufacturing and service sector units.
SIDBI’s initiative is in partnership with Banks, Rating Agencies (RAs), and Accredited Consultants (ACS).
It’s a transparent, structured mechanism for the timely consideration of loan applications.
Business Loans for SMEs from Banks
The most popular way of funding a small-scale or medium-scale business in India is through Banks. There are many Government and Private Banks that provide small business loans at a competitive interest rate.
7. MSME Loans from the State Bank of India
SBI is very popular for SME funding. They have an entire product range for both the manufacturing and service industries. The most lucrative scheme is SBI SME collateral-free loans.
For the manufacturing sector, the original investment in plant & machinery should be up to Rs 5 Crore. For the service sector, the original investment in the equipment should be Rs 2 Crore.
8. MSME Loans from the Bank Of Baroda
Bank of Baroda offers different types of small business loans. Such as working capital finance, term finance, Micro, Small & Medium Enterprises Sector, Baroda SME loan pack, and Small Business Borrowers. They also offer lucrative interest rates.
More SME Business Loans in India from Private Banks & Lending Companies
9. Small Business Loans from HDFC Bank
HDFC Bank offers a wide variety of business loans for different types of requirements. Their loan sanction and disbursal is one of the quickest with easy documentation and doorstep service. The loan rates and charges are very attractive. To apply your business must be profit-making for the last 2 years.
10. Business Loans from Fullerton India
Fullerton India takes care of a wide range of capital requirements, financial needs, and other industrial expenses that are crucial to keeping your business running.
Whether you aspire to expand your current business venture or require new machinery or equipment for your enterprise, the company’s customized business loans aim to provide the right answer to your problems based on your needs.
11. Business Loan & Solutions from Kotak Bank
You can enjoy business growth or expansion without disturbing your personal investments or taking multiple loans with Kotak Business Loans. You can diversify your business or even fund your next project through the bank’s personalized solutions and services. Additionally, you can avail of loans with a flexible repayment solution.
12. Business Loans from NBFCs
Non-Banking Financial Institutions have been the go-to place for funding for MSMEs for a long period. These institutions offer financial and banking services but not as a bank.
They are monitored by the Reserve Bank of India. Some prominent NBFCs in India are Bajaj Finance Limited, Mahindra & Mahindra Financial Services Limited, L & T Finance Limited, etc.
Different Types of Small Business Loans
a) Term Loans
There are different types of term loans today – short-term loans, long-term loans, and mid-term loans, which the entrepreneur can avail of his requirement and financial status. The maximum tenure of a short-term loan will be 3 years and for a long-term loan is 10-15 years. There might be variations in loan interests depending upon the tenure of the loan
Term loans are generally of two types – secured and unsecured. In secured loans, the collateral can be a property, business premises, land, or machinery and will attract lower interest rates than an unsecured one.
b) Temporary Funding
Usually called an Overdraft. The word overdraft means overdrawing from your current account. In other words, the account holder withdraws more money from the account than what has been deposited. If the amount overdrawn is within the limits of a prior agreement, the interest will be charged at an agreed rate.
A higher interest rate is applicable if it exceeds the limits. As an overdraft can be covered with the next deposit, it is an ideal source of temporary funding. An overdraft facility is considered a working capital loan.
c) Bill Discounting
In this process, you get instant cash on large purchases or credit sales made by discounting your purchase/ sales bill at your bank. You need to produce the documents which authenticate the transaction like trade invoices, track receipts/ railway receipts, bills of lading, etc.
d) Letter of Credit
Letters of credit are used primarily in international transactions of bigger value. They are also used in the land development process. The parties involved in the issuance of a letter of credit are the issuing bank of whom the applicant is a client, a beneficiary who is to receive the money, and the advising bank for which the beneficiary is a client.
As a letter of credit is predominantly used in international finance where buyers and sellers do not know each other, the business transaction will be facilitated using the bank’s creditworthiness.
e) Loan Against Property
A Loan Against Property is a type of loan that uses your commercial or residential property as collateral. Loans Against Property are customarily used as a quick means of financing by an SME to expand its business.
The loan amount is derived as a percentage of the market value of the property being offered as collateral. For a loan against property in India, this percentage ranges from 50%-60%, depending on the bank and the nature and condition of the collateral.
f) Unsecured Business Loan
An Unsecured Business Loan is a loan without any collateral/security that helps SMEs and startup companies raise debt for purposes such as expansion, project financing, or equipment financing. An Unsecured Business Loan does not require any collateral. Applicants looking to procure this type of small business funding should ideally have a high credit score.
g) MUDRA Bank Loan
Mudra stands for Micro-Units Development and Refinance Agency Ltd. This organization has been established by the Government of India for development and refinancing activities relating to micro units. Simply with the vision of – ‘Funding the Unfunded’.
Small organizations, companies, and startup entrepreneurs of micro-units in India face a lack of formal financial support in the starting or growing stage of their small businesses. The Mudra bank loan initiative has been taken to provide low-cost funding for MFI (Micro Finance Institutes).
h) Angel Investment
Angel Investors are financially rich people with expertise in certain fields looking to invest in certain startups along with expertise and guidance if necessary. Generally, an angel investor invests in the early or startup stage of a business. They particularly care about the passion, commitment, and integrity of the business owner. This is one of the best small business loan options.
i) Venture Capital Fund
Venture Capitalists are people who normally invest in start-ups purely from a return on investment mindset. They provide the funds in both the early and growth stages. Venture capitalists look for a strong management team, a large potential market, and a unique product or service with a strong competitive advantage.
j) Schemes for Women Entrepreneurs
Banks are now unveiling a slew of attractive lending schemes for women entrepreneurs. Many schemes that are exclusively for women provide relief in terms of collateral security and interest rates. Interest rates vary in most cases from 0.25% to 1% on applicable conditions.
Eligibility Criteria For Getting Small Business Loans in India
The following are the broad eligibility criteria for availing of small business loans in India. The main requirements for acquiring small business loans are the following:
Borrowers should be aware of their credit reports to ensure that it’s up-to-date and accurate. Having a sound credit history is of paramount importance to ensure that lending institutions are favorable to providing finance for your business unit.
Financial institutions review your credit report before reviewing and subsequently approving or rejecting your loan application.
You have to make profit and loss projections for up to a year in some cases. One has to follow industry standards while projecting your profits and losses. If you don’t follow industry standards, or you don’t know what those standards are, try to make explicit any assumptions you are factoring into your projection.
Borrowers have to prepare detailed proforma statements which have to include projections to help lenders gauge the feasibility of the business project unit in the near future.
One of the key determinants that will play a key role in acquiring a small business loan is a robust business plan. Additionally, you must convince the lender that the business proposition is sound in terms of financial viability.
The lending institution must be satisfied with the overall plan layout including capital estimates for start-ups, operations outflow in terms of employees and marketing, assets in terms of infrastructure and equipment, and the capacity to pay off debts.
If you are thinking of starting a small business or an existing business owner and looking for business loans, We hope this article will help you in getting finance in every cycle of a business.