What is a Small Business Loan?
A type of credit or funding offered by private loan lenders to small businesses in a bid to address the following list of expenses:
- Working capital requirements
- Business expansion costs
- Startup requirements
- Real estate purchase
How to get a Small Business Loan?
To acquire a business loan, the following documents are indispensable for your application process:
- Profit and Loss Statement: It is a summary of the profit or loss incurred by the business during a specific tenure.
- Cash Flow Statement: This documents exhibits the cash availability with the company to clear the monthly bills.
- Balance Sheet: This statement displays what the business owns and is indebted to pay during a particular period.
- Business Plan: This document showcases the project plan, income, scope of operation, and expenses to help company owners take decisive decisions.
- Business and Personal Taxes: This document shows the last two years of your personal and business tax returns to help lenders authenticate the income as loan repayment capabilities.
Types of Small Business Loans in India
Here is the list of the different types of small business loans in India:
- Government: Offered to minorities and elderly for office expenses or factory equipment.
- Micro-loans: Provided in exchange for a strong business plan
- Large Business organisations: Offer financial aid to small businesses with potential for growth.
- Personal loans: Provided by different banks and are repaid via instalments.
- Professional loans: Unsecured business loans provided to self-employed individuals based on their financial status.
- Project Finance: Provided to industrial or long-term infrastructure projects.
- Equipment Financing: Offered to purchase new equipment required for business.
- Working Capital Loans: Offered to meet regular business expenses.
- Bill Discounting: Offered to make sure your bill is discounted prior to the maturity date
- Lease rental: Offers term loans in exchange for the lease contracts
- Financial advisory: Offers financial aid from financial experts.
- Insurance: Offers funds for insurance solutions.
- Trade loans: Offered to traders to expand the present business unit or begin a new company.
Benefits of Small Business Loans
Here is the list of the perks of a small business loan:
- Easily accessible: Small business loans are readily available from lenders like banks and non-banking financial companies.
- Multiple repayment options: Such loans have a personalised repayment method that is designed as per the financial condition of the business.
- Hassle-free application process: The loan application process is transparent and effortless. It requires minimal documentation.
- Quick fund disbursal: Small business funds are disbursed to the borrowers expeditiously.
- Customisable solutions: Flexibility to access a plethora of customised solutions as per the business requirement is a plus point of such loans.
- Affordable interest rates: Low and affordable interest rates help borrowers repay the loan on time.
- Helps manage business finances better: Flexibility to use the funds as per the business requirement to earn profit and repay debts, makes these loans appealing.
- Tax relief for businesses: Borrowers get tax deductions on the interest paid on such loans.
- No collateral required: Most small business loans do not require any collateral and offer funds by evaluating the cash flow in the company.
Eligibility for Small Business Loan
In order to be eligible for a small business loan, the candidate needs to meet a standard set of criteria. The applicant:
- Should be an Indian resident
- Should have a minimum age of 21 years
- Must be self-employed with minimum three years of business expertise
- Must have a balance sheet exhibiting profitability
- Must provide IT returns and business turnover proof for the last three financial years
Small Business Loans Offered by Financial Banks
Here is an overview of the several financial banks offering small business loans to entrepreneurs and startup owners:
HDFC Bank Small Business Loan approval
- Not more than Rs. 40 lakh. Rs. 50 lakh in some areas
- Processing fee = 2.5% of the loan
- Overdraft option = Maximum Rs. 15 lakh
- Collateral = Not required
- Bonus = Free life insurance policy
Capital Float Small Business Loan
- Interest rate = Reasonable for loans up to Rs. 50 lakh
- Repayment tenure = Flexible
- Hidden costs = Nil
- Loan disbursement = 2-3 working days
Capital First Small Business Loan
- Interest rate = Reasonable for loans up to Rs. 75 lakh
- Tenure = Flexible (1-5 years)
- Application = Online and door-step banking
- Top-up facility accessible
- Documentation required = Minimum
RBL Bank Small Business Loan
- Loan Tenure = Flexible (up to 60 months)
- Loans available = Secured and unsecured
- Documentation = Swift and easy
- Interest rate = Reasonable for loans up to Rs. 1o lakh
- Collateral = Commercial or residential properties can be used
IIFL Finance Small Business Loan
- Loan amount= Up to Rs. 50 lakh
- Repayment tenure = Flexible
- Collateral = Nil
- Loan processing = Quick
- Documentation – Minimal and transparent
Bank of Baroda Small Business Loan
- Loan amount = Up to Rs. 5 lakh
- Repayment tenure = Flexible
- Collateral= Nil
- Documentation = Nil
- Loan processing = Quick
Axis Bank Small Business Loan
- Collateral = Nil
- Loan amount = Up to Rs. 50 lakhs
- Application process = Online
- Documentation required = Minimal
Documents Required for Small Business Loan
Here are the documents needed for a small business loan:
- Address proof- Utility bill, Passport, Voter Card, etc.
- IT Certificate and Balance Sheet
- Identity proof – Voter Card, Aadhaar card, Passport, etc.
- Business proof, such as trade license, establishment license, etc.
- Commercial property or house property documents
- Bank statements of last 6 months
- Partnership deed, sole proprietorship deed, etc.
Steps to Apply for a Small Business Loan
Here are the online and offline steps to apply for a small business loan for your company:
- Step 1: First, navigate to the lender’s website; if the lender has an online application platform
- Step 2: In the loans section, select small business loans or just business loans
- Step 3: Download the particular application form and enter the needed details
- Step 4: Submit the form along with the documents requested.
- Step 5: The customer service team from the lender’s online portal will go through your documents and submitted form. They will ask your permission to verify the information submitted.
- Step 6: Once all the information and documents submitted are verified and prove your eligibility, the loan will be sanctioned. The loan amount will be sent within some days.
- Step 1: Navigate to the branch of the financial lender and then initiate the business loan application.
- Step 2: Enter the needed details in the business loan application form and then submit it to the branch representative along with the needed documents.
- Step 3: The representative of the financial lender will then authenticate all the documents submitted.
- Step 4: The bank will disburse the loan if your eligibility is confirmed.
Things to Consider Before Applying for a Small Business Loan
Here are the things to consider before applying for a small business loan:
- Shop around for the right business loan: Conduct a comparative analysis of the lenders, based on the loan amount, tenure, fees, interest rates, etc. Select the one that is apt for you.
- Know the loan amount you are eligible for: Lenders evaluate the eligibility of a borrower on the basis of business turnover, expertise, ITR certificate, etc. Eligibility calculators often help in analysing and evaluating eligibility.
- Have your documents in place: Make sure you have all the needed documents before applying for the loan. Please make sure there are no discrepancies.
- Calculate the EMI: Considering the loan amount, processing fee, and interest rate, calculate the EMI with the help of a calculator.
You can pay your EMIs to your lender by adhering to the standing instructions for net banking or auto-debit. You can also provide post-dated cheques to the lender.
Yes. CIBIL score is crucial to avail of a business loan. Along with the CIBIL score, the turnover of your business too plays a poignant role in acquiring a loan for your enterprise.
Yes. A loan application can be cancelled, even after it has been approved. For such cancellation, the borrower is not charged with a cancellation fee.
No. The interest rate on small business loans is determined based on the applicant and the lender. There is no fixed or standard interest rate on such loans.
You can repay your small business loan in 3 feasible ways:
- Direct Debit
- Post Dated Cheques
- ECS (Electronic Clearing Services)
The maximum amount of loan that can be acquired as a small business loan, depends on certain factors. These factors include:
- Business type
- The lender
- Applicant’s credit score
Note: The maximum amount of small business loan that can be deployed to an applicant is Rs. 2 Crores, after taking into considering all the factors mentioned above.
There are several financial lenders who do not emphasize on collateral or security for a small business loan. However, there are others who seek collateral.
Collateral, on the other hand, paves the way for borrowers to get a higher loan amount. This is because, collaterals build confidence among lenders that during a default scenario, the asset will come in handy to recover the loan amount.
The EMI amount for your small business loan depends on the loan amount availed plus the repayment tenure you opted for.
Usually lenders provide a fixed rate of interest on your small business loan. It simply implies that there will be zero fluctuations in the interest rate during the selected repayment period. Add to its credentials, a fixed rate of interest enables the borrower to determine the future payments.
A small business loan can be availed for several purpose, some of which include:
Small business loans can be used for a variety of purposes such as expansion of business to another town or city, increase the cash flow of the business, office renovation, purchase of raw materials, lease bigger office spaces, scale up the operations of the business, etc.
It can be used for several purposes, such as:
- Business expansion to a different geographical location
- Boost business cash flow
- Rent bigger offices
- Raw materials purchase
- Office Renovation
- Boost business operations
The maximum repayment period of small business loans depend entirely on the loan amount and the lender. Usually, lenders offer a maximum repayment period of 60 months.
Yes. Opening a fashion boutique business qualifies for a small business loan. The reason is simple and logical. A fashion boutique generates income, hence it qualifies for a small business loan.
Based on individual CIBIL score and annual revenue, you are eligible to get loan amounts ranging from Rs. 50,000 – Rs. 2 crore.
The average term for a small business loan is usually 12- 60 months.
When an entrepreneur selects a financing plan to support the business, a convenient repayment method is always preferable to the borrower, to lessen their bag of business difficulties.
Lenders comprehend the complexities and intricacies involved in a business. That’s why they always create a personalised repayment plan before disbursing the loan. Not to mention, it assists borrowers to handle better business cash flow and make on-time loan repayments.
Yes. You can prepay the total small business loan to your lender.