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How to Get a Business Loan in India – Complete Guide

Starting or expanding a business often requires financial support. And securing a business loan can be a valuable way to fund your entrepreneurial dreams. India boasts a dynamic economy and thriving start-up ecosystem. The country offers various avenues for obtaining business loans. This comprehensive guide will walk you through the process of getting a business loan in India, covering everything from preparation to application and approval.

Business loans are required for many reasons such as starting new ventures, expansions, inventory, purchases, working capital requirements, vendor and dealer financing, bill discounting, etc.

10 Steps to Get a Business Loan in India

1. Understanding Your Business Loan Needs

Before you begin the loan application process, it’s crucial to assess your business’s financial requirements. Determine the exact purpose of the loan, whether it’s for working capital, expansion, equipment purchase, or something else. Understanding your needs will help you choose the most suitable loan type and amount.

2. Have a Good Cash flow

To secure a business loan, you have to give confidence to the bank. The bank needs to be convinced about your ability to pay back your small business loans.

Submit records of your cash flow to date, plus any future projections to the bank because the bank will be looking for proof that you will have the cash to pay back what you borrow after you’ve covered the operating costs. Prepare documents of your payment history and your personal finances if required.

3. Types of Business Loans in India

There are a variety of business loan options available for startups in India. Some of the popular ones are listed below:

  • Term Loans: Traditional loans with fixed or floating interest rates.
  • Working Capital Loans: To manage day-to-day operational expenses.
  • Mudra Loans: Government-backed loans for micro and small enterprises.
  • Startup Loans: Tailored for new businesses and entrepreneurs.
  • Equipment Financing: Specifically for purchasing machinery and equipment.
  • Invoice Financing: Based on outstanding invoices.
  • Overdraft Facility: Provides flexibility in managing cash flow.

Research these options to determine which one aligns with your business’s specific needs.

4. Eligibility Criteria

Different lenders have varying eligibility criteria, but common factors include:

  • Business Vintage: Lenders often require a minimum operational period, typically one year or more.
  • Credit Score: A good credit history is crucial for loan approval.
  • Annual Turnover: Your business’s annual revenue may influence loan eligibility.
  • Collateral: Some loans require collateral, such as property or assets.
  • Personal CIBIL Score: Often Lenders Check Personal creditworthiness through CIBIL score.

Check with potential lenders to understand their specific eligibility requirements.

5. Documents Required

Prepare the necessary documents, which may include:

  • Business Plan: An overview of your business, its objectives, and financial projections.
  • KYC Documents: Know Your Customer documents for identity and address verification.
  • Income Tax Returns: Personal and business tax returns.
  • Financial Statements: Including profit and loss statements, balance sheets, and cash flow statements.
  • Bank Statements: Typically, the last six months of your business’s bank statements.
  • Business Registration: Proof of your business’s legal registration.

Ensure all documents are up to date and accurate.

6. Selecting the Right Lender

You need to research and compare lenders in terms of interest rates, loan amounts, repayment terms, and customer service. You can choose from traditional banks, non-banking financial companies (NBFCs), and online lenders. Also, consider the lender’s reputation and track record before applying.

7. Preparing a Business Plan

A well-structured business plan is essential. It should outline your business goals, the loan amount required, how you plan to use the funds, and a repayment strategy. A robust business plan increases your chances of loan approval.

8. The Application Process

Once you have selected a lender, complete the loan application form accurately. Be prepared for a thorough credit check and evaluation of your business’s financial health. Review the terms and conditions before submitting your application.

Read: How to Register a Company in India

9. Loan Approval and Disbursement

Loan approval timelines vary. But once approved, the lender will disburse the funds to your bank account. You must ensure you have a clear understanding of the interest rate, repayment schedule, and any associated fees.

10. Managing Repayments

Timely repayment is crucial to maintaining a healthy credit profile. You must set up a repayment schedule that aligns with your business’s cash flow. Do remember, missing payments can have adverse effects on your credit score.

Frequently Asked Questions (FAQs)

What factors do lenders consider when approving a business loan in India?

Lenders typically assess factors such as your credit score, business vintage, annual turnover, collateral (if any), and your ability to repay the loan.

Where to get a Business Loan from the Government of India?

The most popular and best way for startups to get capital assistance in starting a business in India is to access loans and subsidy schemes of Government-led agencies. There are various loan schemes provided by different funding agencies of the government of India to help new entrepreneurs start and run businesses. Some of the most popular ones are listed below:

  • MSME Government Business Loan Scheme
  • Mudra Business Loans
  • Credit Guarantee Fund Government Business Loan Scheme
  • National Small Industries Corporation Subsidy
  • Credit Link Capital Subsidy Scheme

The most important parts in the process of securing a business loan from a bank are a credible project report and your financial track record, popularly called CIBIL. If you have both criteria acceptable to banks, it is not going to be easier to get business loans.

Can startups secure business loans in India?

Yes, there are specific loan products designed for startups. Additionally, some government-backed schemes support new businesses with funding.

What is the typical interest rate for business loans in India?

Interest rates vary depending on the lender, loan type, and creditworthiness. They can range from 8% to 20% or more.

How long is the repayment tenure for business loans in India?

Repayment tenures can vary but commonly range from one year to five years or more, depending on the loan type and amount.

Does collateral play a significant role in loan approval?

Collateral can be important, especially for secured loans. It provides security for the lender and can lead to more favorable terms.

Are there government-backed loan schemes available for businesses in India?

Yes, the Indian government offers various schemes like MUDRA, CGTMSE, and Stand-Up India, aimed at providing financial assistance to businesses, including micro, small, and medium enterprises (MSMEs).