How to Get a Small Business Loan – A Guide for Your Startup

Importance of Loan to Start a Small Business

For a new entrepreneur, one of the biggest hurdles to resolve and overcome is the need for capital. Funds are critical to any business venture. Finding ways to raise money can sometimes become a full-time occupation for a business owner. A business loan can be a very important supplement to the lifeblood of a company.

There are many ways that startup capital can be raised. There is the option of:

1. Going for a bank (most bank offer small business loans these days)
2. Exploring and applying to non-banking financial institutions
3. Using alternative methods such as crowd funding
4. Approaching angel investors and venture capitalists

For most new businesses the preferred method, out of above, is to apply for loans with banks and other alternative lending institutions.

Top Government Loan for Startups and MSMEs

The Indian government has introduced several financial schemes for start-up businesses and MSMEs. Here are some of the leading options:

• Pradhan Mantri Mudra Yojana (PMMY): Under PMMY, startups can access loan for small scale business of up to ₹10 lakh, available through Microfinance Institutions, Small Finance Banks, Commercial Banks, and NBFCs. These collateral-free loans come with repayment terms ranging from one to five years, and the loan amount depends on the business’s growth stage. 

• Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): This scheme offers collateral-free loans of up to ₹200 lakh, along with a guarantee cover for lenders against default. Guarantee coverage ranges from 50% to 85%, depending on the loan type. MSMEs and startups can apply for loans through select banks classified by NABARD, with interest rates aligned with RBI regulations. 

• Credit-Linked Capital Subsidy Scheme (CLCSS): CLCSS provides a 15% subsidy on loans up to ₹1 crore for technological upgrades. This small business funding scheme supports startups focused on producing high-quality products and applies to various technology-related sectors. Eligible businesses can approach any of the nodal agencies or partnered banks for assistance. 

• Bank Loans: Most major banks offer loan for businesses with varied terms, including standard business loans and specialised MSME loans. One example of a bank loan is MSME Business Loans in 59 Minutes. Each bank sets its own interest rates, loan tenure, and eligibility criteria. Once approved, businesses can repay the loan in EMIs. Options include term loans, working capital loans, and other structured solutions for startups. 

Eligibility for Startup Business Loan:

While a business loan can be applied for with a government or private bank or with non-banking financial companies, there are some basic business loan eligibility criteria which need to be met. These requirements vary from institution to institution. For example, government loan schemes often have stringent requirements and do no offer the best business loans for new businesses. Since these schemes are typically refinanced by public and private sector banks, the process is slow and full of hassles. On the other hand, NBFCs have startup loan schemes which offer instant business loans with personalized terms. To get a startup business loan from an NBFC like Lendingkart, you need to meet the following startup business loan eligibility requirements.

• An established business that has been running for more than 6 months.
• A minimum turnover of ₹ 90,000 or more in the past 3 months.
• The type of business should not be categorized under the blacklisted/excluded list for SBA finance.
• The physical location of the enterprise should not be in the negative location list.
• The business should not be a trust, NGO or charitable institution.

How to Get Loan for Starting New Business?

As a startup or a business idea in a nascent stage, the best bet to raise funds lies in non-banking financial institutions. It’s recommended to direct one’s energies towards acquiring capital from alternative lenders rather than traditional banks.

Most banks prefer to give loans to small businesses that are already in existence as opposed to someone who is just starting out. Banks prefer to cover risk and it’s for this reason that the documentation and evaluation processes are long drawn and rather stringent. For a new business, sometimes it can be difficult to meet all the requirements. This greatly affects the chances of getting the loan approved.

Startup Business Loan Interest Rate

Interest rates are one of the major concerns for a small business owner applying for a business loan. Higher interest rates can raise Both the total repayable amount and the money you pay in each EMI. Since most small businesses are operating at very thin to non-existent margins, high interest rates on business loans can be a major deterring factor for them. In extreme cases, not having access to institutional finance can ultimately cause a startup to cease operations.

Now it is an established fact that startup business loans without collateral have higher interest rates due to the increased risk of default for a lender. However, not every startup owner has significant personal or business assets to collateralize. In such cases, FinTech lenders like Lendingkart Finance can help a startup to lower interest rates on a business loan. Since, FinTech firms operate online, they are able to save money that would go in man-hours. These savings are passed onto the customers in the form of lower interest rates. With Lendingkart, you can get interest rates which are customized for your business’s financial profile.

Document & Requirements for Startup Business Loan

The business loan documents vary from lender to lender. Where a traditional bank or government business loan scheme relies heavily on documentation, a FinTech lender relies on the relevant business and KYC documents instead of asking for unnecessary paperwork. Here again, citing the example of the NBFC, Lendingkart Finance, we are sharing a basic list of documents required for startup loans.

• Bank statement for the last 6 to 12 months.
• Proof of business registration such as business registration certificate, GST filing, Gumastadhara, trade license, drug license, TIN or VAT registration.
• Copy of proprietor’s PAN Card.
• Copy of proprietor’s Aadhar Card.
• Copy of the Partnership Deed (if applicable).
• Copy of the company PAN Card.

All these documents are required in the digital format as Lendingkart’s business loan application process in online ‘only’.

Coming to the benefits of applying for business loans with alternative lenders. They make the process rather hassle-free and easy to get through. Some of the advantages that non-financial banking institutions offer are:

1. Slightly more flexible requirements and eligibility criteria
2. Possibility of applying online very quickly
3. Quick turnaround time on loan approvals
4. Instant loan disbursement after approvals

Amongst all these the leniency on the eligibility criteria as well as requirements are the most beneficial.

It is helpful to have lenders who will be willing to consider giving out money to owners who may not have a detailed and long credit history. Your top pick should be lenders who focus on your business idea and go-to-market strategy rather than those who focus on cash flow history. Armed with a solid a dynamic business plan, the loan can be applied for still.

Features and Benefits of Small Business Loans in India

Securing a business loan is crucial for startups as it provides essential funding to support growth and set up operations effectively. Here are some key features and benefits of small business loans online:

• No Collateral: Many loans for small businesses in India are collateral-free, meaning entrepreneurs do not need to pledge any assets. This allows new businesses to secure funds without risking their personal or business assets. 

• Flexible Repayment: Repayment plans often include easy EMI options, allowing startups to manage their cash flow effectively. These affordable EMIs help business owners repay their loans without excessive financial strain. This supports a smoother growth trajectory. 

• Quick Disbursal: Many financial institutions in India process startup loan applications rapidly. Typically, approvals can be obtained within 30 minutes, with disbursements made within 48 hours. This provides timely access to funds. 

Process to get a Small Business Loan to Start a Business

There are different types of business loans available and depending upon the requirement of the business, a relevant one can be sought and applied for. Some popular options of business loan include working capital loans, startup loans, cash advance loans etc.

The first step is to determine how much money is needed and what it is needed for. This will go into the business plan that will be evaluated during the loan approval process.

Once the amount has been determined, the next step is to do some research and seek out the available options in terms of lenders in the market. Choosing a lender is also a process that requires time and effort. Things like credibility of the lender (reputation in the market), interest rate being offered, support system on offer, options of how loans can be re-paid, process of loan application etc. need to be factored in before choosing the one(s) which would be applied for.

Once identified, the next step is to get all the required documentation ready and up to the mark. A great business plan which details out information about the business idea, the profitability of the idea, the scaling plan, the vision behind the idea, projections regarding staff and infrastructure as well as the marketing strategy. A clear and transparent business plan goes a long way in putting the odds in the favorable position.

The final step is to apply and go through the process.

As mentioned, the turnaround time with non-banking financial institutions is rather quick and if all is okay, the loan should come through within a fortnight or less.

Of course, if you have a business that is already 6 months old or more and has a revenue of INR 12 lakhs or more, you can always apply for a working capital loan at Lendingkart! They have a minimum turnaround time of 3 days for eligible businesses.

How to use a Startup Business Loan

The benefits of getting a startup business loans are numerous. You can utilize the money for purposes like business expansion, restocking inventory, working capital management etc.

Startup business loans from NBFCs like Lendingkart give you enough money to invest in multiple things in one go. They have a ticket value which can go up to ₹ 2 crore, helping you launch projects at a faster pace and get into the profit zone.

However, it is also important to remember that you should use the loan funds expressly for the purpose defined in your planning. Spending the loan money unwisely can result into a debt trap for your fledgling business.

What do you think about this article? Please let us know in the comments. If you need to know more about how important it is to choose the right business loan, you can read our article here. We have also written in detail about small business financing options in India and you can read about it here.

Conclusion

Securing the right financing is essential for any startup aiming to establish itself and grow. By understanding the different types of loans available and evaluating start up loan eligibility, business owners can choose the best small business loan to meet their needs. Apply for a small business loan that aligns with your business model can pave the way for expansion and stability. For tailored solutions, Lendingkart provides accessible and flexible options for small business loan in India designed to support Indian startups at every stage.

FAQs:

1. What Are the Key Eligibility Criteria for a Small Business Loan for Startups?

Key eligibility criteria for a small business loan for startups typically include a solid business plan, a strong credit score, a down payment, and collateral. Lenders also consider the borrower’s industry experience and the viability of the startup. Meeting these requirements is essential for securing small business start-up loans, as they help mitigate the risk associated with lending to a new business.

2. What Types of Small Business Loans Are Available for Startups?

Small business loans for startups come in various forms to suit different needs. Options include traditional term loans, SBA (Small Business Administration) loans, equipment financing, lines of credit, and business credit cards. These financial resources cater to new businesses’ capital requirements, providing flexibility and financial stability. It’s essential to explore and choose the most suitable small business start-up loan based on your unique circumstances.

3. How Can I Improve My Chances of Getting Approved for a Business Loan as a New Entrepreneur?

To improve your chances of getting approved for a business loan as a new entrepreneur, focus on building a strong business plan, establishing a good credit history, providing collateral if possible, and exploring small business loan options specifically designed for startups. Research and approach lenders that specialize in small business start-up loans to increase your chances of securing the funding you need.

4. What Are Some Alternative Funding Sources for New Small Businesses Besides Loans?

There are several alternative funding sources for new small businesses besides loans. Consider options like crowdfunding, angel investors, venture capital, personal savings, grants, and small business competitions. These alternatives can provide capital for your startup without incurring debt from traditional business loans, allowing you to explore various avenues for financial support wherever possible.