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written by khatabook | September 27, 2020

Need, Benefits and Importance of a Business Loan

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To build a successful business, you must dream big and big businesses often have a humble start. Some of the world’s biggest companies like Amazon, Microsoft, Apple and even Google were started in small garages of their founders! Take for instance, Amazon, the world’s largest online marketplace, which started off as an online bookstore and has a current valuation of  US $1.56 trillion in market capitalization. Steve Jobs started Apple from his parents’ garage and made it the world leader in advanced technology. The biggest internet giant Google has its roots in the garage of Susan Wojcicki, the CEO of Youtube.

Today, one of the most important factors in starting and growing a business is access to funding. There are several options available if you want to know how to apply for a business loan in India. Apart from angel investors, venture capitalists and crowdsourcing, you can also look at government loans for your business. There are many banks and financial institutions that offer attractive loans for doing business in India.

In this article, we will look at how to get a business loan in India, business loan from government and the best banks for business loans in India. Keep on reading if you want to know about how to apply for business loan in India.

Did you know? The popular fast-food chain Wow! Momo was set up with a meager investment of ₹ 30,000 and received a seed subsidy after six months of hard work. Their current valuation is approximately ₹ 860 crore!

What is a Business Loan?

Businesses require capital for many purposes. Apart from needing working capital, businesses need money to purchase raw materials, hire employees, upgrade their technology, expand and grow their business, scale up marketing amongst others. When a business owner or an entrepreneur requires capital for their business, they often take a business loan from the banks. Small businesses also take financial assistance from many government schemes that have been put in place to provide such organizations easy access to capital.

A business loan is a debt that your business is obligated to repay according to the terms and conditions finalized at the time of taking the loan for business. In India, you can take loans from private people or banks or Non-Banking Financial Companies (NBFCs). Business loans improve vastly the chances for companies to achieve success and enable growth. Since business loans are in high demand, not every company that applies for a loan receives it. It depends on a lot of factors that are important to the lenders of the loan. The lenders evaluate a company’s history, the amount of debt it has and the risk-taking capacity of the company.

Who Needs a Business Loan?

It is a known fact that more than 80 % of new businesses are unable to survive in their initial stage because of shortage of capital. The following categories of persons often face liquidity crunch while starting and growing a business in India.

1. Shopkeepers

Small businesses like kirana or grocery stores, medical stores, mobile shops, garments and retail shops are the lifeblood of Bharat. Many people dream of opening a small shop or a micro business but are daunted by the financial challenges accompanying it. 

However, banks and NBFCs can be helpful in this regard if you want to get a business loan for your shop. You may wish to know how to get a government loan for a grocery store in India or what is the process to apply for a business loan for a shop

First, it is important to know how much capital you need and what is the loan amount you wish to avail. The process of how to apply for a business loan is quite simple and hardly takes much time.

  • Check if you are eligible for a loan.
  • Get your documents ready (PAN, Aadhar, etc)
  • Submit your online application on the bank website
  • Upload your documents
  • Loan is approved

2. Women-Led Businesses

In addition to this, if you are a women entrepreneur, you can apply for a business loan under various schemes aimed at proving financial assistance to women in business, such as - 

  • Udyogini Scheme
  • Oriental Mahila Vikas Yojana
  • Bharatiya Mahila commercial loan
  • Dena Shakti Scheme
  • Cent Kalyani Scheme

Also Read: Learn About Getting a Business Loan for Shopkeepers

3. Start Ups and MSMEs

India is home to more than 100 unicorns, i.e. companies valued at more than US $1 Billion and this number is continuously growing. Most of these startups are venture capitalists funded. However, you can easily get a government loan for business if you have a startup or a micro or small business in India.

Micro, Small and Medium Businesses are the backbone of Indian economy. Start-up loans and government loans for MSMEs are readily available if you are looking for a business loan to grow and expand your business. There are various schemes like Bank Credit Facilitation Scheme, Pradhan Mantri Mudra Yojana, Credit Guarantee Scheme, Standup India Scheme and MSME loan in 59 minutes, etc if you wish to avail of govt business loan schemes.

Many banks and Non-Banking Financial Institutions such as HDFC Bank, Tata Capital, Kotak Mahindra and Fullerton India offer business loans at attractive interest rates under NBFC business loan schemes.

4. E-Commerce Businesses

Online Marketplaces have become all the rage in recent years. With the advent of online shopping, digital payments and fast delivery of goods and services, many offline businesses have opted to become e-commerce sellers. It is very easy to get business loans for online businesses or e-commerce businesses in India. Do you want to know how to get a business loan for your e-commerce company.

Most e-commerce loans are unsecured loans and do not require a collateral. However, you must first check whether you are eligible for a business loan and look at the process and documents required for a business loan for your e-commerce company.

Advantages of a Business Loan

It is important to understand why you may need a business loan and the benefits of a business loan in India. Business loans have the potential to change the course of your business and fast track it on the path to success. Lack of funding is a substantial reason for making or breaking a business. Here are the advantages of getting a loan for your business -

  1. Business Loans improve the creditworthiness of your business.
  2. Business Loans are disbursed quickly and will not impact business operations.
  3. Very little documentation is required making the process of getting a loan easier.
  4. Some customers may not even be required to furnish collateral or security in some cases.
  5. Interest rates on business loans are often affordable and reasonable.
  6. The tenure for business loans are quite flexible.
  7. In contrast to getting funds from investors who get a share of your company’s ownership, business loans allow you to be in complete control of your business and its finances.
  8. The interest on business loans is tax deductible.
  9. Business loans can help you expand your business by bringing in working capital.
  10. Business Loans provide the necessary cash flow and cover any emergency needs.

Also Read: Indian Government Loans for Startups and MSMEs

How to Apply for a Business Loan?

Money is at the core of all businesses. Before applying for a business loan, it is important to consider the following aspects -

1. Know the requirements of your business

Understand the purpose for which you are applying for a business loan. The business loan may be for business expansion, starting a new venture or subsidiary, inventory, equipment, hiring, expanding to new location, and so on. Also be clear on the loan amount you intend to borrow so that it does not fall short of your requirements or alternately, becomes a big hassle to repay.

2. Decide which type of loan you want

There are many types of loans to choose from. You can get terms loans - both secured and unsecured. You can also avail of an overdraft facility, demand loans, letter of credit facility, loan against securities, cash credit facilities, bank guarantee and more. Do your research on which type of loan would be best for your business.

3. Check your Credit Score

It is crucial to be aware of your CIBIL score or Credit Score before you apply for any type of loan. If you have a good credit score of 600-700, it will be easier for you to get a business loan for your company. However, if you have a credit score of 400 or less, you should take a look at the reasons behind it and take steps to repair your cibil score.

4. Know the Repayment Terms

Always be well informed of the repayment terms, interest rates and other terms and conditions of your business loan. Choose the loan tenure and mode of repayment such as EMI as per your repayment capacity. Always be careful not to miss your EMI as it will negatively affect your credit score.

5. Check your Eligibility

Ensure to check the eligibility criteria at the bank where you are applying for a business loan.

Here are some important criteria for getting a business loan - 

Age

18 - 65 years

Who is eligible?

Individuals, SMEs, MSMEs, Sole Proprietorship, Partnership firms, public and private limited companies, limited liability partnerships, retailers, traders, and manufacturers engaged in only services, trading, and manufacturing sectors

Nationality

Indian citizens

Minimum Turnover

Depends on the bank

CIBIL Score

600 and above

Business Existence

Minimum 2 years

6. Get your documents ready

Make sure that all the required documents for getting a business loan are in order. You will need an Aadhar card, PAN Card, Business Plan, Last 6 months bank statements, income tax returns, audited balance sheet and so on. 

Process of Applying for a Business Loan

You can apply both online and offline for a business loan from a bank. Let’s look at the process of applying online for a business loan.To get the loan for your business, you should follow the step-by-step process given below -

  • Step 1 - Go to the website of the bank from where you wish to take a loan
  • Step 2 - Select the tab - Loan and click on Apply now
  • Step 3 - You will see an application form on the webpage.
  • Step 4 - Fill the application with all your correct and latest information 
  • Step 5 - Enter Submit after you have filled all the details.
  • Step 6 - A bank official will contact you in 2-3 days to process your application.

For offline application, go to the nearest bank branch and fill the application. Submit it to the bank official and your loan application will be processed in 2-3 days.

Also Read: Top 5 Government Loan Schemes for Small Business in India

Conclusion:

Business Loans are a safe and efficient way to avail of funds for your business. Moreover, with the advancement of technology, taking business loans has become easier and quicker with the myriad of options available in different banks and non-banking financial institutions. Check your loan eligibility, credit score and other requirements before you apply for a business loan in India. We hope that now you have sufficient information about how to get a business loan. 
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: What are some of the small business loan schemes launched by the government of India?

Ans:

Here are some of the notable government schemes that can be availed for a business loan - 

  • MSME Loan in 59 Minutes
  • Pradhan Mantri Mudra Yojana (PMMY)
  • Credit Guarantee Scheme (CGS)
  • National Small Industries Corporation Subsidy (NSIC)
  • PMEGP (Pradhan Mantri Employment Generation Program)
  • Stand-Up India

Q: What are the factors that can affect business loan interest rates?

Ans:

The given factors have an impact on the interest rate of business loans - nature of business, business existence, cibil score, turnover, collateral and type of loan.

Q: What are the types of a Business Loan?

Ans:

There are the following types of loan related to business - 

  • Working capital Loan
  • Term Loan (short term and long term)
  • Letter of Credit
  • Equipment / Machinery Loan
  • Overdraft Facility
  • Bill/Invoice Discounting
  • Loans under Government Schemes
  • Start Up Loan
  • Merchant Cash Advance

Q: What is a Business Loan?

Ans:

A business loan is a loan or funding taken from a bank or financial institutions for the purpose of expanding or setting up a business.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.