Applying for a business loan is important for entrepreneurs and established business owners in India. There are various types of business loans, such as term loans, working capital loans, invoice financing, loans against property, and startup loans. To be eligible for business loans, applicants must be at least 18 years old, and the business must be registered in India. Documents such as the PAN Card, financial statements, and income tax returns of the business are required. When it comes to the sole proprietorship, the documents of the proprietor are required.
In this blog, we will walk you through the key aspects of applying for a business loan in India.
What is a Business Loan?
A business loan is a financial product offered by banks and financial institutions to help businesses meet their operational and expansion needs. These loans can be used for various purposes, including purchasing inventory, upgrading equipment, expanding the business, or managing working capital.
Types of Business Loans Available in India
- Term Loans: These loans are either long-term or short-term financial assistance that businesses can use for expansion, upgrading, or capital investment. They come with fixed repayment schedules over a set period.
- Working Capital Loans: Designed to meet the day-to-day operational expenses of a business, these loans help cover costs like salaries, rent, and inventory, ensuring smooth cash flow management.
- Equipment Financing: This type of loan allows businesses to purchase machinery or equipment, often with the equipment itself acting as collateral. It helps businesses acquire essential assets without upfront payments.
- Invoice Financing: This loan is based on the value of outstanding invoices. Businesses can access funds by using unpaid invoices as collateral, providing immediate cash flow to continue operations.
- Loan Against Property: These secured loans use business or personal property (such as real estate) as collateral. They offer larger loan amounts with lower interest rates compared to unsecured loans.
- Startup Loans: Specifically tailored for new businesses, these loans cater to startups that have innovative ideas but might lack collateral or a proven track record. They help with initial funding and growth.
- Business Line of Credit: This is a flexible loan where businesses are approved for a specific credit limit and can borrow money as needed. It provides quick access to funds for any immediate requirements.
- Microfinance Loans: Microfinance loans are designed for small businesses or entrepreneurs who may not have access to traditional banking services. These are often offered by NBFCs or Microfinance Institutions at favorable terms.
Eligibility Criteria for Business Loans in India
To secure a business loan, applicants need to meet the following criteria:
- Must be major in age: The applicant must be 18 years or above.
- Registered Business: The business must be registered in India, such as a registered Private Limited Company, Limited Liability Partnership, or Partnership Firm.
- Credit Score: The business must have a good credit score, generally above 650.
- Financial Documents: Profit & Loss statements, balance sheets, bank statements, and ITR.
- Collateral: It is required for secured loans.
Documents Required for Applying for a Business Loan
You need the following documents for applying for a business loan in India:
- Business Registration Proof such as Certificate of Incorporation of Company, Udyam registration, GST Registration, etc. PAN Card and Aadhar Card of the applicant.
- Bank Account Statements for 6-12 months of the business entity. In case of a Sole Proprietorship, you need the bank account statement of the proprietor.
- Profit and Loss Statement, Balance Sheet of the business and proprietor in case of sole proprietorship
- Income Tax Returns of 2-3 years
- Proof of Collateral (if applicable)
- Business Plan for startups or expansion
How to Apply for a Business Loan?
- Assess Your Financial Needs
- Check Eligibility with different lenders.
- Prepare all necessary financial and personal documents.
- Choose the Right Lender by comparing interest rates, terms, and fees.
- Complete and Submit the Application.
- Verification and Approval
- Upon approval, the funds are disbursed to your account.
Government Schemes for Business Loans
There are almost 10 government schemes for business loans in India, which are as follows:
- Pradhan Mantri Mudra Yojana (PMMY): This scheme provides financial assistance to micro and small businesses, including startups, for income-generating activities. Loans under PMMY are classified into three categories: Shishu (up to ₹50,000), Kishore (₹50,000 to ₹5 lakh), and Tarun (₹5 lakh to ₹10 lakh).
- Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): The CGTMSE scheme offers credit guarantees to micro and small enterprises, enabling them to access loans without requiring collateral.
- Stand Up India Scheme: It aims to promote entrepreneurship among women and members of the Scheduled Castes (SC) or Scheduled Tribes (ST) communities. This scheme offers loans ranging from ₹10 lakh to ₹1 crore for setting up greenfield businesses.
- Make in India: The scheme was launched by the government to encourage domestic and foreign investments in the manufacturing sector to provide various incentives and financing options to businesses involved in manufacturing and production.
- Pradhan Mantri Rojgar Protsahan Yojana (PMRPY): This scheme provides subsidies to employers in the manufacturing and service sectors, which helps businesses expand their workforce for hiring new employees.
- Technology Upgradation Fund Scheme (TUFS): For businesses in the textile industry, TUFS offers loans and subsidies for technology upgrades to enhance efficiency.
- National Small Industries Corporation (NSIC) Subsidy Schemes: NSIC provides various financial assistance schemes to micro, small, and medium enterprises (MSMEs) to help them with capital for business operations, machinery procurement, and expansion.
- Startup India Scheme: This initiative aims to promote entrepreneurship by offering tax exemptions, access to easy loans, and self-certification for compliance with labor and environmental laws. Startups can also avail of benefits like funding from the government’s Seed Fund Scheme and getting listed on the National Stock Exchange (NSE).
- National Credit Guarantee Trustee Company (NCGTC): Under this scheme, MSMEs can avail themselves of a collateral-free loan for working capital and investment purposes. It also offers credit guarantees to lending institutions for loan risks.
- SIDBI Make in India Loan for Enterprises (SMILE): This scheme offers financial support to MSMEs in sectors such as textiles, manufacturing, and others under the ‘Make in India’ initiative.
Common Challenges in Getting a Business Loan
- Poor Credit History
- Lack of Proper Documentation
- Insufficient Collateral
- Low Annual Turnover
- High Debt-to-Income Ratio
Conclusion
Applying for a business loan in India requires careful planning, proper documentation, and an understanding of eligibility requirements. By preparing in advance and choosing the right loan product, businesses can secure the necessary funding to achieve their goals. Make sure you research well, understand the type of financial institution that can provide loans at the best interest rates, and various government schemes to make an informed decision.
