How to Get a Business Loan in India

Recent trends and survey reports indicate that at least 42.50 million SMEs (Small and Medium Enterprises), both registered and unregistered, are in existence in India today. These businesses make up about 95% of the country’s industrial units.

As a consequence, the employment opportunities that SMEs provide are enormous - with over 106 million individuals (about 40% of India’s total workforce) being employed in this sector, second only to the agricultural sector.

These numbers reveal that small businesses contribute significantly to the Indian economy - a whopping 40% of the total GDP, to be exact.

Since small businesses, startups, and entrepreneurial ventures contribute to the country’s economic growth and employment, it is only natural that financial institutions and government bodies set up various loan schemes to encourage more entities to start their enterprises.

Before we talk about how to avail a business loan for such organisations, let’s first look at what a business loan is all about.

How Do Business Loans Work?

Small-time enterprises in India are offered a certain amount of capital (depending on the type of loan) by financial institutions, lenders, and government bodies to carry out various business operations.

Organisations must, in exchange, pay the principal amount that was lent to them along with an additional interest amount (aside from other fees they may have incurred). These fees entirely depend on what kind of a business loan your organisation wishes to acquire.

Typically, enterprises must repay these loans according to a schedule set by the loaning body.

A point to be noted though, is that the terms of repayment as well as the rates of interest vary, depending on the loan scheme a business is opting for.

When is it a Good Time to Take Out a Business Loan?

Whether you own a startup, a small business, or if you’re someone who wishes to begin an entrepreneurial venture in India, there are a few things you need to keep in mind before taking the step of acquiring a business loan. Here’s a look at the situations that determine whether you’re ready to apply for loan schemes.

Firstly, you have to ensure that you have a strong, well-structured, and organized business plan.
You must know exactly where each portion of your capital is going, how it is going to be utilized, and whether you’re assured of ROI (Return on Investment).
You should have taken all the precautions necessary to ascertain that your return on capital is going to be higher than your loan interest amount.

Is it a Good Idea to Use a Business Credit Card for Personal Expenses?

The reason why Indian business owners and entrepreneurs are encouraged to get a business credit card is just so that they’re able to distinguish business expenses from purchases of a personal nature.

Moreover, organisational expenses are typically tax-deductible to ensure that your company expenses can be accounted for, and you do not end up using your business credit card for purchases that are outside of what your organisation requires to function.

As such, at the time of filing your taxes, you don’t have to worry about government audits ruining your business operations.

Steps to Getting a Business Loan

Organisations can adequately prepare themselves and reduce frustration by keeping themselves informed of the procedure and steps involved in getting a business loan. This, in turn, increases the chances of an entity’s loan being approved.

Learn How Banks Assess You

Before you begin the loan application process, you’d be saving plenty of time and energy if you spend some of it in understanding how financial institutions and government bodies in India are going to be evaluating your loan application.

Whether it is a bank that is providing you with a loan or a government body that has set aside a specific scheme for small businesses, startups, or entrepreneurs, these lenders are ultimately going to assess whether your venture will bring them a certain amount of profit or not.

They will also consider whether your financial situation will allow you to make payments in a scheduled or periodic manner. Here’s a brief look at what lenders will be looking into when you apply for a loan:

Credit Scores

When lenders assess the creditworthiness of a small business, they’re not only going to look into an entity’s business credit profile but will also give equal focus to their personal credit score.

This is done to ensure that your enterprise can make daily, weekly, monthly, or quarterly payments (depending on the schedule proposed by the lender), taking into account how the entity has made payments in the past.

Credit History

Banks inspect the extent of your credit history to evaluate your eligibility for a business loan. Financial bodies could further look into a detailed account of your credit usage that is handed over to them by credit bureaus as well as other suppliers.

As such, your credit score is more or less a comprehensive look at the way you manage your credit, whether it is for business purposes or personal reasons.

Collateral

Although plenty of government schemes such as the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGFMSE) and the Udyogini scheme set up to empower women requires zero collateral, most business loans set up by banks, traditional lenders, credit unions, and government agencies have some form of collateral or the other.

So, to err on the side of caution, small businesses must take steps to have collateral as a guarantee, so that they can make it further into the application process.

Decide What Type of Loan or Financing You Need

As a small business or startup owner, the onus of finding the most suitable loan naturally falls on you. Therefore, you need to equip yourself with knowledge of financing and everything that falls under it so that you can narrow in on a business loan that will complement your business’ credit situation.

Government Loan Schemes for Small Businesses

Since government schemes are by the plenty in India, it is safe to assume that business loan sanctions set up by the central government or various state governments are what small businesses and startups consider as their ‘go-to’ option. Here’s a look at the ones that top the list in terms of feasibility.

MSME Business Loans in 59 Minutes - Set up in 2018, the Ministry of Micro, Small & Medium Enterprises (MSME business loans) permits small new and existing businesses to make use of the financial assistance granted by this scheme. Organisations can avail up to 1 crore with the loan approval being granted inside of 59 minutes.

MUDRA Loans - Sanctioned by the Micro Units Development and Refinance Agency Bank, MUDRA loans is a government initiative that was set up to provide financial assistance to micro and small businesses in India. The scheme goes by the tagline “fund the unfunded”, which follows the idea of low-credit requirements curated especially for such enterprises.
Stand-Up India Scheme - The Stand-Up India Scheme set up by the government was specifically introduced to supply business loans for scheduled castes, scheduled tribes, and women. The scheme is governed by the Small Industries Development Bank of India [SIDBI] institution, with the loan ranges being granted falling between 10 lakhs and a crore.
Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGFMSE) - This scheme allows micro and small business owners to apply for loans without collateral. The government body provides working capital loans ranging up to 200 lakhs, with women entrepreneurs being given priority.
National Small Industries Corporation Subsidy - An ISO certified government enterprise falling under the MSME (Ministry of Micro, Small & Medium Enterprises) category, this scheme allows small businesses to avail loans for marketing as well as credit support.

Traditional Bank Loan

Getting a loan from a traditional bank in India should perhaps be the last resort since you’d end up paying large interest rates. But if you’re in a position where you’ve done business with a bank already, the business line of credit or term loan would come at quite low interest in such a case.

Make sure you’ve fully understood the repayment terms (it could range between one and twenty years) and the loan amount you’re applying for. The process usually takes four months at the most.

Term Loan

Term loans are what entities most often opt for when they want to avail a loan for their business. Lenders will approve a loan amount to you based on your organisation’s credit history. The tenure for term loans is quite simple. If you have collateral, then your tenure is fixed to 15 to 20 years.

If your business does not have any collateral, then your tenure is fixed to 1 to 5 years. The advantage of securing a term loan is in the fact that once the loan amount is approved, the lender disburses the funds in a lump sum payment.

Startup Loan

These loans are ideal for startups and new businesses that are just burgeoning because an entity wouldn’t have a great credit history to apply for this loan, to begin with.

Accordingly, loan eligibility is assessed based on not just the startup’s company profile, but the personal credit profile of the borrower as well.

A major eligibility criterion for a startup loan includes having an already established business, with the applicant submitting details stating that the business is in existence and is registered as such.

Working Capital Loan

When small businesses fall short of the capital needed to run daily or regular operations, entities can avail of the working capital loan to bring in a balanced cash flow. Organisations facing difficulty during off-seasons or at times when the demands of peak season cannot be met are more reasons to make use of this loan facility.

Organisations belonging to the retail or manufacturing industry, traders involved in export and import, service providers, and wholesalers are major applicants of the working capital loan.

Invoice Financing

This is the type of loan small businesses in India apply for when there’s been a delay between generating an invoice and receiving payment for goods and/or services from a client. Invoice financing thus involves providing a loan against the amount that was generated in the invoice, with the lender providing funds for about 80% of the original invoice amount.

The entity can simply repay the loan amount once they’ve been paid by its client along with the interest amount stated by the vendor (within the tenure period decided upon).

Equipment Financing

For business operations to run seamlessly, organisations need funds to purchase costly, state-of-the-art machinery. As such, small businesses falling under the manufacturing industry can make use of equipment financing loans also referred to as machinery loans.

So it makes sense for small businesses to make use of the equipment financing loan to purchase necessary equipment as it serves a specific objective. The equipment itself serves as collateral, so it’s a win-win situation for both lenders and borrowers. The interest amount for this loan is quite low as well.

Business Loan for Women

Certain financial institutions provide loans specifically for women entrepreneurs. As mentioned earlier, the Indian government also has schemes set in place solely to support and encourage businesswomen. These loans are provided to organisations running small and medium-sized enterprises.

The biggest benefit of this type of loan is the fact that the loan amount is quite flexible by default, such that women entrepreneurs can acquire funds for their startups at discounted rates and with the added advantage of going through a swift loan process.

Decide on a Lender

Since different lenders provide different types of services, enterprises need to pick a lender that can finance you in a way that is beneficial to your business. Let’s take a brief look at the most sought-after lender categories.

Direct Lender

As the name suggests, these lenders do not require the participation of a third party for the loan application process to be initiated. Whether it is to do with filling in your loan application, receiving the desired loan amount, or making regular payments, you need not go through an intermediary to achieve any of this.

Direct lenders include traditional banks, credit unions, investors, and online vendors.

Lending Marketplaces

An excellent option for Indian businesses looking for a quick solution to their financial situation, lending marketplaces exist online and the process works much faster compared to traditional financial institutions.

These online platforms allow organisations to look for lenders based on a series of qualifications (specified by you). You will then be directed to a list of results based on your qualification criteria, including your credit score, loan amount, and so forth.

P2P

The peer-to-peer type of lending solution is ideal for businesses that could not meet the loan criteria set up by traditional banking systems. This type of lending space is fast becoming popular among small and medium-sized enterprises alike.

Crowdfunding is a supreme example of P2P lending since it involves the initial sharing of your story, stating the details of your circumstances, and subsequently obtaining funds from a lender who is interested in seeing your organisation flourish.

Determine Your Chances of Getting Approved

Although it is natural to assume that when lending institutions pre-qualify you for a loan based purely on standard information you’ve provided to them, it doesn’t necessarily mean that your actual loan application process is complete.

The fact is, the approval for your loan is far from over. Without an exhaustive inquiry of your credit score, its history, and your credit report in general, there is very little chance of your loan being approved.

As such, your Indian business needs to sift through your initial loan applications in a manner wherein it reaches only the likeliest of lenders. Look into your credit score and assess whether they fall between the desired loan bracket (700 to 900) for it to be deemed acceptable by traditional financial institutions.

Anything below or between 680 and 700 is too low of a credit score for banks to consider the application. If a bank does accept such a low credit score, it is only in exchange for sky high-interest rates. Therefore, it is incumbent for entities to weigh the odds before they end up spending a lot of time and energy on the loan application.

Gather Your Documentation

If you intend to apply for a formal business loan via traditional banks, credit unions, or government schemes, you have to ensure that all your documents are in order. Accordingly, there are quite a few of them that you need to keep at hand. Here’s a look at what a majority of financial institutions and government bodies expect to see.

Documents required for most government scheme loans

The loan application form (filled) along with passport-sized photographs of the business/startup owner.
Documents related to KYC include the borrower’s identity, proof of age, and proof of address (passport, Voter ID card, Aadhaar Card, Driver’s license, PAN card, Utility bills like your water or electricity bill).
6-months bank statements (the most recent ones).
A certificate confirming the establishment of your business.
Address proof of the business along with a PAN card.
If you belong to the SC/ST/OBC category, you need the documents to prove it.
GST verification certificates.
Income tax verification.
Document verifying ownership of the business or startup.

Most financial institutions may require the following documents

The personal and business credit score reports.
Bank account statements.
Tax return documents for both your personal as well as business tax accounts.
License, registration and certification documents permit you to do business in your locality, city, and so forth.
Relevant legal contracts.

Determine What Security or Guarantee Can be Provided

Business owners in India need to understand that the biggest worry of lenders is knowing whether a borrower can repay the loan amount in full along with the interest accrued. Lenders are so apprehensive that they will go so far as to fix security interest on both personal as well as organisation assets such as business equipment, company property, accounts receivable, and so forth.

As such, the more security interest you’re able to fix, the more likely it is that your loan will be approved. However, entities must ensure that they do not end up using any of their personal belongings as security as that would be a difficult situation to come out of even if lenders insist on taking such a step.

Analyse the Key Terms of the Proposed Business Loan

A precautionary measure that organisations must take before availing of a business loan in India is to ensure that they have analysed all the important terms that have been proposed by a financial body. You can go a step further by comparing the loan to what alternate lenders have to offer you. Here’s a look at some of the terms that need a second glance.

Find out what the interest rate of the loan is and whether there is a possibility of it changing throughout your loan tenure.
Determine how regularly you would have to repay the interest amount.
Ensure that you are aware of when the principal loan amount is due or how its repayment has been spread over the years.
Ascertain what the origination fees (fees incurred upon entering into a loan agreement with a financial institution) are.
Find out whether you have to pay up any other additional fees such as the fees for processing, administrations, and so forth.
Verify the situations in which the lender can default on the loan.
Determine whether you would have to incur a penalty amount if you happen to repay the loan before the affixed time?

Fill Out the Application

The final step of applying for the business loan is to duly fill out the loan application form. This process is fairly simple. If you’re applying for a loan online, you’d have to fill in all the details on your digital device and if you’ve applied for a loan via a traditional bank, a financial institution, a credit union, or a government scheme, it would involve filling out the details onto a form (with pen and paper).

Although filling out the application form is a tedious process, it is quite worth the effort at the end of the day.

Wrapping Up

Admittedly, there are quite a few things that Indian enterprises must keep in mind before they file for a loan application. Understanding how business loans work, sifting through different types of loans to finally pick one that works for your organisation, and finally choosing a lender whose criteria is best suited for financial requirements.

But going through these steps would ensure that your small business can repay the loan amount without a hitch and ultimately allow your business to grow and thrive.

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