Small and Medium Enterprises (SMEs) are one of the drivers of socio-economic development in India and contribute significantly to the Gross Domestic Product (GDP). The count of SMEs in India stands at 42.5 million, both registered and unregistered, making up around 95% of the industrial units in the country. Expand the scope towards Micro enterprises and you will find that the number of MSMEs increased at a whopping CAGR of 18.5% from 2019 to 2020 (Source: IBEF).
Certainly, running and expanding SMEs in India require capital investment backed by financial institutions and government bodies. This can be considered the reason why the loan disbursals to MSMEs in India stood at Rs. 9.5 trillion in FY21 (IBEF).
All these numbers do paint a blossoming picture of the business growth in India. But if you want to grow your business or have plans to start a new one, you would want to know how to get a business loan. In this guide, we will cover different aspects of business loans in India and the steps you can follow toward successful loan disbursement.
How do business loans work?
Business loans work similar to any other type of loan provided by different lenders (banks or NBFCs) in India. As a business owner, you can receive a certain amount of capital in the form of a loan from financial institutions to support the operations and plan for growth.
You need to repay the principal amount borrowed with an additional interest component according to the repayment schedule defined by the lender. You may also incur certain fees/charges at the time of applying for the business loan. These charges are determined by the type of business loan you borrow.
You should also know that the terms of business loan repayment and the interest rate may vary from one lender to another.
What should you consider before getting a business loan?
Getting a business loan is not as easy as it may sound. It is because lenders take into account various factors to determine your loan repayment capacity and then follow a predefined procedure to approve or reject a business loan application.
The last thing you would like to hear after applying for a business loan is the notification about the application being rejected. However, you can prepare yourself and increase the chances of business loan approval by keeping in mind some important sides of business loans, which are:
Know how the banks will evaluate your application
Before you apply for a business loan, it is crucial to understand how various banks and other lenders in India will assess your loan application. Irrespective of the lender you select, your financial capability will be checked to determine if you can repay the loan in the stipulated time. In general, the lender will look at the following three parameters to check your creditworthiness:
- Your credit score or CIBIL score that represents your loan repayment history if any
- Credit history that reflects the kind of loans you have borrowed in the past and the current outstanding if any
- Collateral which is taken up as a guarantee against the loan you borrow for your business needs
Zero in on the right type of business loan or financing option
As a business owner, the onus of finding a suitable loan option falls on you. Hence, it is important for you to equip yourself with knowledge about different types of business loans you can benefit from. These include:
|Type of Business Loan||Description|
|Working capital loan|
|Loan against property|
Besides these types of business loans, you can also opt for government loan schemes for small businesses, such as the MUDRA loan, Startup India scheme, Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGFMSE), and MSME Loan in 59 minutes.
Select the right lender
These days, different types of lenders provide financial services to businesses. Before you select any of them, you must know about their suitability for your business. The following table enlists lender types from whom you can borrow business loans:
|Type of lenders||Description|
|Peer-to-Peer (P2P) Lenders|
Gather the required documents for business loan
Irrespective of the lender you select to get a business loan, you must ensure that all the documents are in order. Given below is the list of documents that are commonly required while applying for a business loan in India:
- PAN card – of individual or company
- Identity proof which can be a passport, Aadhar card, PAN card, or driving license
- Address proof which can be an Aadhar card, passport, driving license, or voter ID card
- Bank statement for the last three to six months
- Last ITR along with the details of income computation, P&L account, balance sheet, etc.
- Other documents like a copy of the partnership deed, sole proprietorship declaration, etc.
- GST verification certificate
- Business ownership document
Select the security or guarantee to be provided
For a lender offering business loans in India, one of the biggest concerns is whether the borrower will be able to repay the loan amount with the accrued interest. Hence, it is important that you decide which asset can be used as collateral for your business loan.
In general, you can use the following assets as collateral to get a business loan:
- Personal investments in mutual funds, bonds, and jewelry
- Real estate – either residential or commercial
- Expensive machinery
Analyze the key terms related to the business loan
As a precautionary measure, you must analyze all the financial terms that have been proposed by the lender before approving your loan application. In general, it would be best if you give the following aspects a second glance:
- Check the interest rate charged for the business loan amount and whether it will stay the same during the loan tenure
- Look at how the principal amount is spread over the repayment years
- Ascertain the processing fees to be incurred after loan approval
- Find out whether the lender is asking for any additional fees
- Consider the penalties you would incur for not paying the loan amount timely
Apply for it
Once you are convinced about the legitimacy of the lender and all the loan-related terms, you can proceed with filling out the business loan application form either offline or online. Make sure you fill in the information carefully to avoid any complications later.
When is a good time to borrow a business loan?
Whether you own a small business, startup, or an established business venture, you need to know that the need for funds to maintain and grow the operations will most likely be constant. However, borrowing a business loan for the same is not always a good idea. Before you apply for a loan to support your business, you must keep in mind the following things:
- Have an organized business plan in place to support your goals
- Chart out how you will utilize the loan amount and where to assure a significant return on the investment
- Consider all the measures to ensure that the return on the capital invested via a business loan is higher than the loan interest to be repaid
For almost every type of business, borrowing a loan is no less than a part and parcel of continuing with the operations. The availability of lenders and loan options has made it easier to apply for a business loan and get it approved. However, it is important that you understand how a business loan is processed, its types, and its suitability for different financial situations.