How to Get Small Business Loan in India

Are you looking for a small business loan from in 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 purchase, working capital requirement, vendor and dealer financing, bill discounting, etc.

Here is a Stepwise Guide on How 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.

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.

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.

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.

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 includes 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.

Where to Search for Small Business Loans

Do some individual research. Search online and offline to find banks which 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 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, Weaver Mudra Scheme (WMS), etc.

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 for your own business.

Documents Required for Getting SME loans

Here we list down some of the basic documents that bank or financial institutions will ask when processing your business loan application.

1. 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).

2. Proof of residence – Recent telephone bill, electricity bill, property tax receipt/ Passport/ Voter’s ID Card of the proprietor, partner or Director (if a company).

3. Proof of business address

4. Proof of Minority

5. 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.

6. * Memorandum and articles of association of the Company/ Partnership Deed of partners etc.

7. * Assets and liabilities statement of promoters and guarantors along with latest income tax returns.

8. * Rent Agreement (if business premises on rent) and clearance from pollution control board if applicable.

9. * SSI registration if applicable. 10. * 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

10. * 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).

11. * In the case of takeover of advances, sanction letters of facilities being availed from existing bankers/ Financial Institutions along with detailed terms and conditions.

12. * 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).

13. * Last three years balance sheets of the Associate/Group Companies (If any). (APPLICABLE FOR CASES WITH EXPOSURE ABOVE Rs.25 LACS). …………………… Contd.

14. * 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).

15. Review of account containing month wise sales (quantity and value both), production (quantity and value), imported raw material (quantity and value), indigenous raw material (quantity and value), value of stocks in process, finished goods (quantity and value), debtors, creditors, bank’s outstanding for working capital limits, term loan limits, bills discounted. (APPLICABLE FOR CASES WITH EXPOSURE ABOVE Rs.25 LACS).

16. Photocopies of lease deeds/title deeds of all the properties being offered as primary and collateral securities.

17. The position of accounts from the existing bankers and confirmation about the asset being Standard with them (In the case of takeover).

18. Manufacturing process if applicable, a major profile of executives in the company, any tie-ups, details about raw material used and their suppliers, details about the buyers, details about major competitors and the company’s strength and weaknesses as compared to their competitors, etc. (APPLICABLE FOR CASES WITH EXPOSURE ABOVE Rs.25 LACS). (The checklist is only indicative and not exhaustive and depending upon the local requirements at different places addition could be made as per necessity)