Looking for a business loan can be a big step to helping your company grow, manage day-to-day operations, or even start a new enterprise. It is however a process that can feel overwhelming without the right knowledge.
In India, small business loans are the lifeblood of entrepreneurs, particularly in Micro, Small, and Medium Enterprises (MSMEs). This article explores everything you need when applying for an MSME business loan to make sure you’re ready.
What is a business loan?
Business loans refer to those that help you meet your needs and are provided by banks or financial institutions. It may be for buying equipment, maintaining cash flow, or funding new projects. They are either secured (loans that require collateral such as property or assets) or unsecured (loans that don’t need collateral but have higher interest rates) typically.
In India, many financial institutions offer customized credit products for MSMEs, recognizing them as the backbone of the economy.
Everything you need to know before applying for an MSME business loan
Prepare before application
The following steps should help you in making your business loan application process smooth:
Know your purpose
- Concisely state the reason why you need it.
- Some of the common reasons include expansion of business operations as well as purchasing inventory or technology upgrades.
Know about different types of loans
- Term loan — This type suits large expenditures for instance purchase of equipment.
- Working capital loan — It helps run daily activities.
- MSME business loan — Specially made available for these categories of enterprises.
Check Eligibility
There are distinct qualifications that most Indian banks and Non-Banking Financial Companies must meet which comprise:
- Minimum turnover of business.
- Stable credit history and a CIBIL score above 700.
- Must have been operating for at least 2-3 years.
Prepare documents
Ensure that you have with you:
- Identity proof along with address proof (Aadhaar card/PAN card etc.).
- Business registration document plus tax details.
- Financial statements include balance sheet/profit & loss account.
- Bank statements for the last 6 to 12 months.
Compare lenders
- Interest rates, repayment terms and processing fees across banks and NBFCs need to be evaluated.
- There are several platforms on the web where you can do this exercise to know who is giving out what.
Pro tips on improving your business loan application
Maintain a high credit score
Your credit score will determine whether you qualify for the loan or not; besides it also dictates your interest rates. A score above 750 places you in a better negotiating position.
Be prepared to provide collateral (if needed)
Offering very high-value assets or property as collateral helps reduce the rate of interest charged particularly for secured loans.
Ensure constant source of income flow is available
The flow of cash plus income should be stable for lenders to know that you will be able to pay back their money.
Government schemes on MSMEs
The following are some of the schemes that the Indian government has established with respect of MSME business loan options:
Here, are several schemes aimed at helping small entrepreneurs secure financing through cheap credit:
- Mudra loans are for small businesses that have a maximum limit of ₹10 lakh.
- Shishu (from ₹50,000), Kishore (₹5 lakh) and Tarun (₹10 lakh) are funded under this category.
- Stand-Up India Scheme provides ₹10 lakh- ₹1 crore to SC/ST or women entrepreneurs through loans.
- SIDBI loans are given by the Small Industries Development Bank of India (SIDBI) to cater to MSMEs who need financial assistance.
These plans mainly aim at empowering companies through low-interest available credit.
Mistakes to avoid
Low research
The majority of businessmen involved in lending blindly take loans without first comparing interest rates from different microfinance providers thus increasing their overall cost.
Incomplete documentation
Another common reason why people are not approved for a loan is missing documents which might happen if you are careless about its preparation or simply running out of time.
Overborrowing
You should borrow only what you can afford to repay comfortably instead of taking excess that might strain your finances at some point in life.
The bottom line
When getting business loans from India, understand all the details that go behind applying for the business loan and give it much thought. Invest time and energy in planning how you will go about applying for business loans.
Start with assessing yourself by understanding why you even need one. Look up various loans that will be mindful of your targets. Also, have a business loan application ready and make sure you comprehend the process, lest the chances of getting denied decrease significantly.