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About Small Business Loans

If you are running a business of your own, it must have happened more than once that you need additional funds to buy a new equipment or run a new campaign. Often, small business owners need financial assistance to realize their entrepreneurial dreams or just to keep their business afloat. Small business loans are available for this purpose alone. It is different from other loans.

Small business loans are not offered to individuals and are highly competitive in the market. These loans have tenures that range from 3 to 5 years and are secured. There is a high-risk factor in this type of loan. Normally, the loan is used to meet working capital requirement, purchase industrial equipment or for expansion purpose. The lender thoroughly reviews the business financials before considering to offer this loan. All leading banks in the country offer small business loans.

Small Business Loans
Small Business Loans

Purpose of Small Business Loans

Small business loans boost business dynamics in the small and medium enterprise sector. They help in small business owners to keep their business cycle going and make plans for growth initiatives. There are different types of small business loans to cater different purposes. Some of them are :

Government Schemes :

There are many Government schemes to boost the capacity of small businesses across the country. These are given to small entrepreneurs, minorities, women, for factory expansion and meeting office expenditures.

Project Finance :

These loans are specifically provided for long-term infrastructure or industrial projects with flexible repayment terms.

Working Capital Loans :

These loans specifically help those units that need additional funds to keep their business running smoothly

Professional Loans :

These loans are unsecured loans offered to professionals like CA, Doctors, Company Secretary and such. It is not offered to manufacturing units or small business units. The loan amount typically varies between Rs. 25,000 up to Rs. 25 lakhs depending on the background of the business.

Micro Loans :

Micro loans are offered to support a new business plan or new venture. The repayment period is 6 years.


Micro Units Development and Refinance Agency Ltd. Yojana offers loans up to Rs.10 lakh at very low interest rates for self-employed people.

Lease Rental :

These types of loans are offered against lease rental to facilitate business needs.

Insurance :

The loans are offered specifically for offering insurance solutions for business needs.

Trade Loans :

These loans are offered only to traders for setting up their business or expand the existing set-up. The interest rate is based on prime lending rate which can be either fixed or floating.

Features of Small Business Loans

Small business loans are handy to the business owners when they need some additional funds to carry out expansion activity or buy a new equipment to start a new line or even just to meet their daily expenses. Normally, small business loans need to be secured with a collateral. However, some loans that are lesser in amount may not require a collateral. The loans that are offered with a collateral will have lower rate of interest. Some small business loans are offered on the basis of the revenue generated, balance sheet and business models. There are many public sector banks like SBI, Bank of Baroda, and private banks like ICICI Bank, HDFC Bank etc., that provide small business loans in rural and semi-rural areas.

Small business loans are very risky in nature. The lenders are faced with low profits, non-performing assets due to larger number of defaulters and insufficient capital. While the opportunity is huge, the lenders tread this path carefully because of the wavering nature of small businesses.

Eligibility Criteria

There are some criteria on the basis of which banks offer the small business loans. An outline has been mentioned below:

  • Sound credit history :
  • As is the case with retail loans, the banks strongly consider the credit history of the business before sanctioning a small business loan. This helps in getting favourable terms and conditions of the loan. If the credit report of the business is not up-to-date, there is a good chance of loan rejection by the bank.

  • Feasibility :
  • Small business loans are often considered only if the business has a robust feasibility plan. The profit and loss projections need to be up-to-date and as per industry standards. This helps the bank gain confidence in the business and approve the loan application. A feasibility plan helps the bank gauge the future of the business.

  • Business Plan :
  • The financial conditions of the small business enterprise can be understood from the business plan that is submitted by the owner. This needs to be in order to convince the bank of the future plans and financial viability. The capital investment, working capital requirements, debts, assets etc. come into play before a bank can approve the loan application.

Benefits of Small Business Loans

Small business loans are a helping hand for a businessman to meet the contingencies in his business. Some of the benefits are:

  • Reasonable Interest Rates :

    On the basis of the business condition and future plans, the banks are inclined to offer small business loans at competitive interest rates to suit the business needs. The business could be a long-term customer of the bank and there are needs that will arise in the future that make such businesses a long-term customer of the bank. Hence, it is relatively easy for such business to procure these loans at a reasonable rate.

  • Easy Accessibility :

    Today, many banks and NBFCs offer small business loans in large numbers. It is easy to track these loans by the businesses. Also, because this scheme is widely available and businesses find it easy to use the EMI online calculators to plan their finances, it has become quite accessible to different types of business enterprises.

  • Tailored Financing :

    Most banks and institutions tailor the business loans to the needs to the business. These loans are secured and business cycles continue irrespective of the financial situation. Hence, there is a general understanding that the risk involved can be managed even at a later stage.

  • Online Application :

    With advancement in technology, banks now offer online application for these loans. It reduces the paperwork involved and helps in faster processing of the application. This positively impacts the working of the business.

  • Repayment Options :

    Because of the nature of the loan and the amounts involved, banks are able to offer different types of repayment options to the business. Once the loan is disbursed and the financial requirements are met with, the business enterprise will be able to manage its cash flow and related money transactions in a better manner. This in turn helps the bank and the business to agree upon a customized payback option for the loan.

Interest Rates and Other Charges

Funds are the most important requirement to ensure a business can run smoothly. A business loan helps a business enterprise to meet its financial contingencies or sudden obligations without much hassle. Business loans are offered at low interest rates as they are widely available. Entrepreneurs prefer to keep liquidity in their portfolio and borrow money to meet their needs which leads to increased demand for business loans.

An outline of the interest rates and other charges involved while applying for a business loan is mentioned below:

Interest rate11% and upwards
Type of interest rateFlat and Diminishing
Loan AmountDepends from bank to bank
Tenure6 to 60 months
Processing fee0% to 3%

*It is important to note there that the above-mentioned charges are indicative and will vary from lender to lender. You are advised to check with the lender directly at the time of loan application for updated details.

How to Apply for a Small Business Loan

Applying for a loan is much easier today. Banks have evolved their processes and made it customer friendly. One can apply for a small business loan online with most banks. It helps in faster turnaround and less documentation. Visiting the nearest bank branch and consulting a bank representative is another option. This helps in clarifying any doubts and making the submission then and there.

FAQs- Small Business Loans

1. What is diminishing interest rate?

Under the diminishing interest rate scheme, the rate is applied on the remaining loan amount every month. After every month’s EMI, the borrowed loan amount decreases. And therefore, the interest rate is calculated on the remaining amount only.

2. Is it possible to have a co-applicant for a business loan?

Yes, if the business has co-owners, they can be co-applicants while applying for a business loan. This helps in increasing the creditworthiness of the application too.

3. Do NBFCs offer lower interest rate than banks?

There is not much difference in the interest rate charged by banks or NBFCs. Both offer competitive rates in the market. However, the terms and conditions may vary.

4. How important is the financial statement of the company while applying for a business loan?

It is very important to have the financial statement of the business in order before applying for a loan. The statement shows the health of the company and helps the bank decides on the various aspects of the loan.

5. What are the factors that affect the interest rate of the loan?

The main factors affecting the interest rate of the business loan are credit history, liabilities, share value, years of running and annual income.

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