How to Get a Small Business Loan in India
Are you a startup and looking to get funding from banks or financial institutions? Find here in this article a stepwise guide on the processes and documentation required to get a business loan from banks.
Business loans are required for many reasons such as starting new ventures, expansions, inventory, purchase, working capital requirement, vendor and dealer financing, bill discounting, etc.
How to Prepare for Small Business Loans
#1. 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.
#2. Provide Collateral
Banks look for collaterals as a form of security of the cash borrowed. Collateral can be property, equipment, stock, or other assets. In lending agreements, collateral is a borrower’s pledge of specific property to a lender, to secure repayment of a loan.
The collateral serves as protection for a lender against a borrower’s default—that is, any borrower failing to pay the principal and interest under the terms of a loan obligation. Getting a loan becomes easier if you can offer collateral as security, especially if you’re a starting business for the first time. You can use your personal assets if your personal finance permits.
#3. Have Sufficient Capital
Banks always look forward to working with entrepreneurs who are serious about making the business venture a success. Banks will compare the amount of cash you’re looking to borrow with the amount already in your business, or with the amount of your own money you’re planning to invest.
If you’re investing a good amount of your own money in the business, banks get confidence that you’re committed to making a success of the business.
Suggested Read: How to Register a Company in India
#4. Past Records
For banks, past records and testimonials of the borrower count. Lenders will consider your education, your track record, and your general attitude towards doing business. If you’re serious about it, they’ll be much more likely to take you seriously. Good credit reports and impeccable references from people you’ve done business with will all help build your case, persuading your bank that you’re a good candidate for a loan.
#5. Present Business Atmosphere
You might have looked at the state of your industry and the risks faced by your company as part of your business planning. Lenders will probably ask to see your analysis of things, so brush up on the latest trends and developments in your industry. It’s all about context, of course, which means banks will consider how you plan to use the loan, the state of your specific industry, and overall economic conditions. Be prepared to talk about your strategy for meeting challenges and dealing with threats.
6. Your Small Business Loan Bank Proposal
Prepare a Detailed Project Report before you approach a bank for small business loans.
Here are the chapters you need to cover in your business loan proposal
Provide Loan Information
- Indicate the requested loan amount and how you will use the loan proceeds.
- Identify the requested terms of the loan (loan length, interest rate, etc.)
- List the collateral available to secure the loan along with current market values.
- Specify the owner’s equity contribution. (How much cash are you contributing to the project?)
Describe Your Business
- Provide a description of the business history and current status of the business along with a detailed explanation of all products/services.
- Include an explanation of the future plans for the business and how the loan will benefit the business. Discuss any planned changes to business operations.
- Identify the specific location of the business. Include a written explanation of required improvements to the facility as well as the costs of those improvements (if applicable).
Describe the Market and Marketing Strategy
- Discuss the market for your business. Who is your target customer base? You must demonstrate that there is sufficient demand for your products/services.
- Identify key competitors and suppliers. How do these players affect your business?
- Discuss your specific marketing strategy/plan. What are the specific costs related to this marketing plan?
Information on Management and Personnel Requirements
- Discuss your personnel plan and key staff, including a description of their roles in the business.
- Discuss the relevant experience of management and how that experience will contribute to the success of the business.
- List other key advisors (ex. attorney, accountant, insurance agent).
Business Financial Information
- Provide 3 years of tax returns.
- Include a current income statement and balance sheet for the business.
- Demonstrate loan repayment ability through financial projections. Provide monthly income statements and cash flow projections for one year. Include an explanation of all assumptions used in developing projections.
- Include a list of existing business debt (if applicable).
- Include a Personal Financial Statement as of the same date as the current income statement and balance sheet.
- Personal Resume
- Important Legal Documents (such as Articles of Incorporation)
- Price quotes and/or estimates for equipment or construction to be paid for with loan funds
- Other relevant information/exhibits that help showcase your business
- Copy of the franchise agreement (if applicable).
Where to get 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 the Government-led agencies. There are various loan schemes provided by different funding agencies of the government of India to help new entrepreneurs to 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.