Are you looking for a small business loan from India in starting your business as a beginner? Are you an existing entrepreneur looking for small business loans to expand your business? If so, find here in this article a detailed guide on the process of getting a business loan for small business owners.
Business loans are required for many reasons such as starting new ventures, expansions, inventory purchases, working capital requirements, vendor and dealer financing, bill discounting, etc.
Here are the Steps to get a Small Business Loan for a Startup in India
Before applying for a loan, you need to understand exactly what you are applying for a loan. Here are a few business categories mentioned.
1. Select the Loan Type
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 upon 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 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.
c) Bill Discounting
In this process, you get instant cash on large purchases or the 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, bill 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 buyer and seller do not know each other, the business transaction will be facilitated using the bank’s creditworthiness.
The documents, a beneficiary needs to present in order to receive the payment include a commercial invoice, bill of lading, and an insurance policy that covers the goods in transit.
Having insurance attached to your property/ equipment is a cushion for credit managers to sanction the loan as it is always the concern of the bank, the security, and the risk patterns attached to each business. Some banks even insist on having insurance.
So a clear and professional business plan is very important before approaching a bank. You should also have a thorough knowledge of the market for your products and how you are going to operate.
Banks are also focusing on long-term working capital loans for SMEs and the expansion of credit facilities to new geographical areas like the lesser-developed states, thereby promoting an inclusive growth of SMEs across the country. Further, the Government is also taking considerable initiatives to step up credit flow to SMEs.
2. Where to Search for Small Business Loans
Do some individual research. Search online and offline to find banks that look like they might be willing to lend what you need to a business like yours. Speak to friends and business contacts – especially anyone you know who has gone through this process before.
The most obvious places to start are with the banks that manage any of your business or personal accounts. As you’ve already built up some history with them, they may be more likely to help you with a loan.
Some of the popular government-sponsored business loan schemes you can check are Mudra (PMMY) scheme, CGTSME scheme, Standup India Scheme, Prime Minister’s Employment Generation Programme, and Weaver Mudra Scheme (WMS), etc.
3. How To Approach A Bank for Small Business Loans
Before you approach any banks, prepare a comprehensive loan proposal. This should provide key information about you and your company. Include key details about how much cash you want to borrow, what you’re going to do with it, and an honest explanation of how you’ll pay it back.
Banks will also want to see detailed information about your business structure, ownership, location, future plans, key customers, and suppliers. They like to lend to companies they feel they know well, so additional information about the most important people in your company – including their experience and qualifications.
As in the case of any other loans, in business loans also creditworthiness is evaluated by your repayment capacity and reliability. For this, banks will analyze the financial statements and records of your business.
The capital money you have personally invested in your business is also important from the bank’s perspective because it is the level of confidence you have in your own business.
4. Documents Required for Getting SME loans
Here we list down some of the basic documents that banks or financial institutions will ask for when processing your business loan application.
Proof of identity
Voter’s ID Card/ Passport/ Driving License/ PAN Card/ signature identification from present bankers of the proprietor, partner, or Director (if a company).
Proof of residence/ business address
Recent telephone bill, electricity bill, property tax receipt/ Passport/ Voter’s ID Card of the proprietor, partner, or Director (if a company).
Last Three Year Balance Sheets
Last three years’ balance sheets of the units along with income/sales tax returns etc. (APPLICABLE FOR ALL CASES FROM RS. 2 LACS AND ABOVE). However, for cases below fund-based limits of Rs.25 lacs if audited balance sheets are not available, then unaudited balance sheets are also acceptable as per extant instructions of the bank. For cases of Rs.25 lacs and above, the audited balance sheets are necessary.
Memorandum and articles of association of the Company/ Partnership Deed of partners etc.
Assets & Liabilities Statement
Assets and liabilities statement of promoters and guarantors along with latest income tax returns.
Rent Agreement (if business premises are on rent) and clearance from pollution control board if applicable.
Provide SSI registration if applicable.
Projected Balance Sheets
Projected balance sheets for the next two years in the case of working capital limits and for the period of the loan in case of term loan. (APPLICABLE FOR ALL CASES FROM RS. 2 LACS AND ABOVE).
Profile of the unit (includes names of promoters, other directors in the company, the activity being undertaken, addresses of all offices and plants, shareholding pattern, etc. (APPLICABLE FOR CASES WITH EXPOSURE ABOVE Rs.25 LACS).
Project report (for the proposed project if term funding is required) containing details of the machinery to be acquired, from whom to be acquired, price, names of suppliers, financial details like capacity of machines, capacity utilization assumed, production, sales, projected profit and loss and balance sheets for the next 7to 8 years till the proposed loan is to be paid, the details of labour, staff to be hired, basis of assumption of such financial details, etc. (APPLICABLE FOR CASES WITH EXPOSURE ABOVE Rs.25 LACS).
Editorial Staff at NextWhatBusiness is a team of Business Consultants having years of experience in small and medium scale businesses.