Business loans

Business loans are an essential requirement for small business owners. In any stage of the business lifecycle, you may have faced the requirement of funding. Securing funds for a startup is one of the toughest challenges an Entrepreneur’s faces while starting a new business. Here in this article, we intend to explore the best small business loans for Indian entrepreneurs for different purposes./p

You also must know the advantages and disadvantages of each funding methodology. Such as estimating the number of funds required, the application of funds, projected financial position of the business including the returns generated, and evolve a strategy

It is all required to approach and secure the required funds. Apart from angel investors and venture capitalists, banks are one of the largest funders of startups in India. They are providing funding to thousands of startups each year.

In product-based business two types of loans are mainly required by the owners. One is a term loan to buy equipment and machinery. Another is the working capital loan for stocking inventory. In a service-based industry, the working capital requirement is much higher than a term loan.

Business Loans for SMEs from Banks

The most popular way of funding a small scale or medium scale business in India is through Banks. There are many Government and Private Banks that provide small business loans at a competitive interest rate. Below listed some of the reputed banks providing MSME loans.

Business Loans from NBFCs

Non-Banking Financial Institutions has been the go-to place for funding for MSME for a long period. These institutions offer financial and banking services but not as a bank. They are monitored by the Reserve bank of India. Some prominent NBFCs in India are Bajaj Finance Limited, Mahindra & Mahindra Financial Services Limited, L & T Finance Limited, etc.

Different Types of Small Business Loans

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 of 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. An overdraft facility is considered as a working capital loan.

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 buyers and sellers do not know each other, the business transaction will be facilitated using the bank’s creditworthiness.

Loan Against Property

Loan Against Property is a type of loan that uses your commercial or residential property as collateral. Loans Against Property are customarily used as a quick means of financing by an SME to expand its business. The loan amount is derived as a percentage of the market value of the property being offered as collateral. For a loan against property in India, this percentage ranges from 50%-60%, depending on the bank and the nature and condition of the collateral.

Unsecured Business Loan

An Unsecured Business Loan is a loan without any collateral/security that helps SMEs and startup companies raise debt for purposes such as expansion, project financing, or equipment financing. An Unsecured Business Loan does not require any collateral. Applicants looking to procure this type of small business funding should ideally have a high credit score.

MUDRA Bank Loan

Mudra stands for Micro-Units Development and Refinance Agency Ltd. This organization has been established by the Government of India for development and refinancing activities relating to micro units. Simply with the vision of – ‘Funding the Unfunded’.

Small organizations, companies, startup entrepreneurs of micro-units in India face a lack of formal financial support in the starting or growing stage of their small businesses. Mudra bank loan initiative has been taken to provide low-cost funding for MFI (Micro Finance Institutes).

Eligibility Criteria For Getting Small Business Loans in India

The following are the broad eligibility criteria for availing of small business loans in India. The main requirements for acquiring small business loans are the following:

Credit history: Borrowers should be aware of their credit report to ensure that it’s up-to-date and accurate. Having a sound credit history is of paramount importance to ensure that lending institutions are favorable to providing finance for your business unit. Financial institutions review your credit report before reviewing and subsequently approving or rejecting your loan application. Business feasibility: You have to make profit and loss projections for up to a year in some cases. One has to follow industry standards while projecting your profits and losses. If you don’t follow industry standards, or you don’t know what those standards are, try to make explicit any assumptions you are factoring into your projection. Borrowers have to prepare detailed proforma statements which have to include projections to help lenders gauge the feasibility of the business project unit in the near future. Business Plan: One of the key determinants which will play a key role in acquiring a small business loan is a robust business plan. Additionally, you must convince the lender that the business proposition is sound in terms of financial viability. The lending institution must be satisfied with the overall plan layout including capital estimates for start-ups, operations outflow in terms of employees and marketing, assets in terms of infrastructure and equipment, and the capacity to pay off debts. If you are thinking of starting a small business or an existing business owner and looking for business loans, We hope this article will help you in getting finance in every cycle of a business.

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