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Introduction

Indian economy has its backbone in the MSME sector. Small scale industries contribute to about 65-70% of the start-up ecosystem. The Indian economy is classified as a ‘Developing Economy’. It is highly driven and is currently constituted by 95% of industries belonging to small businesses. 40% of total industrial output is contributed by these small industries and they also contribute around 45% of the total exports from India.

Any new business venture needs a capital. Venture capitalists and Angel Investors don’t readily pour in millions of rupees for every new venture. Non-availability of timely and adequate funds can dampen the spirit of entrepreneurship. In addition, arranging for collateral or security can be tough for a few. There are also other factors like stringent government policies, legal framework, regulatory gaps, unreliable information, etc.; that could delay the process of procuring the initial capital.

It is important to support these industries financially to get the optimum output from them. The right kind of financial support at the right time is essential for the small business machinery to keep running seamlessly. The Government gives numerous subsidies to small business loans to reduce the interest burden on these borrowers.

In India, both the State and Central Governments have a number of loans specified for small business owners to meet their requirements. Many public sector banks too have various offers to assist small scale businesses. These schemes help entrepreneurs to obtain financial assistance to fulfil their business needs.

Age EligibilityTurnover LimitAge of BusinessInterest RatesRepayment Tenure
21 – 65 yearsAt least Rs.1.5 lakhs per annumAt least 3 years13 – 24 %12 months – 5 years

What are the different kinds of Small Business Loans available in India?

Business loans are of different types. They are disbursed based on the type of business and the financial needs. The most common types of Business Loans are:

Who all are eligible to apply for a Small Business Loan?

The following entities, classified as Small Businesses as per Government guidelines, are eligible to apply for a Small Business Loan

  • Retailers
  • Manufacturers
  • Traders
  • Sole Proprietorship Firms
  • SMEs, MSMEs and Large Enterprises
  • Partnership Firms involved only in Manufacturing, Trading or Service sectors
  • Private limited companies and closely held limited companies

What are some of the purposes I can utilize Small Business Loans for?

You can use your small business loan to: 

  • Increase your business cash flow
  • Expand, repair or upgrade your current business unit
  • Renovate your office
  • Purchase, lease or repair machinery and equipment
  • Upgrade to the latest technology
  • Stock up on inventory
  • Hire seasonal employees
  • Purchase raw material for bulk orders
  • Expand to another area or city
  • Scale-up operations and take on bigger projects and much more

Is there an age criterion to apply for Small Business Loans?

Yes, there is an age criterion to apply for Small Business Loans

Minimum 21 years of age – Maximum 65 years of age

What is the income criterion to apply for Small Business Loans?

For a Private Limited or Limited Company 

  • For loans up to Rs. 15 Lakhs – a net annual income of more than Rs. 1.5 lakhs
  • For loans over Rs. 15 Lakhs – a net annual income of more than Rs. 3 Lakhs

For a Proprietorship firm or a limited liability partnership

It is determined by the bank. The company should submit their profit and loss statements. If it meets the minimum criteria of the lender, it will then assess the repayment ability of the borrower before sanctioning the business loan.

What are the factors determining my eligibility for Small Business Loan?

Business Plan: If you are applying for a Small Business loan for your start-up, make sure that you have a solid business plan. The plan should clearly elucidate the business potential, the financial outcome for the next few years. The plan should show the ability of the business to sustain, while underlining the security and risk factors of the business to the lender. A well-executed business plan will evoke confidence and faith in the borrower.

Business stability: If you are an existing business setup, your financial stability is important to the bank. They are going to look into the sales and profit aspects of your business. They will want to look into your business history and the tenure of your company. Usually, banks prefer companies which have a tenure of at least 3 years to sanction the loan. A well-established business with a stable profit is going to instil confidence and ease for the bank about your repayment capability.

Business Profitability & Continuity: Another important criterion is that your business should be making considerable profit. Banks wouldn’t want to lend money to a business that is not doing very well. Banks usually prefer businesses that are at least 3 years old and have been making profit consistently. Your organization’s profitability and revenue play an important role in determining if a company can be given a loan or not.

Current relationship with the Bank: Banks are naturally going to lean towards existing customers. If you have a good standing with the bank it is an additional advantage for you. The bank will look into all your relationships with the bank. The cash flow and payments into your account. It will also assess your repayment history on any existing loans you have with the bank.

Collateral: Though many government schemes give collateral free business loans, the borrower can pledge some kind of collateral, that he is comfortable with, to get better loan terms and interest rates. The government guidelines state that collateral is not mandatory, the applicant is free to provide some. Pledging a collateral acts as additional security on the loan, allowing for higher loan amounts and lesser interest rates.

What are the documents needed to apply for a Small Business Loan?

  • Signed Application Form
  • Identity Proof (Individuals) - PAN card, Passport, Driving License, Aadhar Card, Voter ID, any Govt. issued ID card
  • Identity Proof (Business Entities) – PAN card
  • Residential Address Proof (Individuals) - Passport, Driving License, Election ID card, Electricity/ Telephone/ Mobile bill/ bank statement (not more than 3 months old)
  • Business Address Proof - Bank statement, utility bill, Registry copy, lease or rent agreement, TAN allotment letter
  • Proof of Business Existence – PAN card, GST Registration, copy of Partnership Deed, Trade License, Certificate of Practice, Registration Certificate issued by RBI, SEBI
  • Last 3 years’ ITR (self and business), Profit and Loss Account, Balance Sheets Certified/Audited by a CA.
  • Last 12 months’ bank account statement (self and business)

Small Business Loans FAQs

1. How do I apply for a Small Business Loan?

Small business loans are offered by various banks and NBFCs. You can contact the bank branch or their customer care number to apply for small business loans with them.

2. How long does it take to approve a small business loan?

These loans need careful assessment and hence can take anywhere between 7 days to 15 days for approval. However, with the current technological advancements, small business loans are being approved in as less as 48 hours.

3. What is the age criterion to apply for a small business loan?

The age eligibility is minimum of 21 years and maximum 65 years.

4. Is credit score important for small business loans?

Yes, a credit score of at least 750 is good for small business loans.

5. What is the minimum and maximum tenure of business loan?

Small business loans are generally given for a short period of time. Their tenure is usually between 12 months to 60 months.

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