New Delhi (India), June 5: Small and Medium Enterprises, denoted as SMEs, are considered one of the drivers of socio-economic development in India, which makes a significant contribution to the Gross Domestic Product. As per the statistics, the SMEs count in India relatively stands at 42.5 million, accounting for both registered and unregistered, which make up over 95% of the industrial units in the entire country. 

Exploring the scope around Micro enterprises, you will notice that the number of MSMEs has evolved at a whopping CAGR worth 18.5% over the past two years. Henceforth, to operate and expand, SMEs in India need capital investment supported by financial institutions and government bodies, which is why the loan disbursals to MSMEs in India of over Rs. 9.5 trillion in FY22 (IBEF). 

Apart from the statistics, the latest trends and surveys indicate that, consequently, the employment opportunities provided by Small and Medium Enterprises are enormous. It covers around 106 million individuals, worth 40% of the total workforce in India being employed in this domain which lies second to the agricultural sector. All these figures do paint an empowering picture of the business growth in India. 

However, if you are willing to grow your business or are still in the midst of plans for starting a new one, you might be curious to know how to get a business loan. We resolve your worries with this detailed guide on various aspects of business loans in India, the things you need to consider before applying to any scheme and the steps you can follow for successful loan disbursement.

Types of Business Loans- Secured loan and Unsecured loan. Secured loans are loans that need collateral/security, which borrowers are asked to deposit with the lender to use funds. In terms of unsecured loans, you do not need to submit any kind of collateral/security with the Bank or financial institution. Let us get deeper into the concepts of business loans.

How Do Business Loans Work?

Business loans work the same as other types of loans offered by diverse lenders like banks in India. Being a business owner, you are eligible to receive a particular amount of capital which is referred to as a loan from financial institutions that will support the operations and plan for growth. 

In the meantime, you are responsible to repay the principal amount borrowed with an extra interest component as per the repayment schedule settled by the lender. You can also incur explicit fees or charges at the time of applying for the business loan. Such charges are fixed by the type of business loan you attempt to borrow. 

You also need to know about the terms of business loan repayment along with the interest rate, which might differ from one lender to another. Note that the least eligibility for applying for a loan in India suggests applicants should be a minimum of 22 years of age, have a business experience of at least five years and have a CIBIL score of 750 or above.

How to Apply for a Business Loan?

We all agree that getting different types of Business Loans is not as painless a task as it may sound. This is due to lenders that consider various factors to ascertain your loan repayment capacity and then the person in charge needs to follow a predefined procedure for approving/rejecting a business loan application.

Rejection of a loan application is the last thing you would like to hear after curiously applying for a business loan. However, you should prepare yourself for the worst-case scenario, follow every point mentioned below and increase the possibility of business loan approval by benchmarking the important sides of business loans-

1.1. Know the criteria of banks to evaluate your application

Before applying for a business loan, you should understand the way banks or any other lenders in India tend to assess your loan application. Irrespective of the in-charge you select, they thoroughly check your financial capability to decide if you will be able to repay the loan in the stipulated time. Typically, the lender investigates three parameters to check your creditworthiness:

-- Your credit score is noted as CIBIL score, which refers to your loan repayment history, if any
-- Credit history tends to show the kind of loans you recently borrowed in the past and the present outstanding if any
-- Collateral is considered a guarantee against the loan you are applying to borrow for your business requirements

2.2. Choose the right type of business loan or financing option

Being a business owner, the onus to find a suitable loan option is up to you. Hence, you need to equip yourself with certain knowledge about various types of business loans so you can enjoy the utmost benefit. A few are named Term loans, Startup loans, Working capital loans, Equipment financing, Invoice financing, and Loans against a property.

3.3. Pick the right lender

Now, you will find wide types of lenders offering financial services to businesses. Hence, before you choose any of them, you should consider their suitability for your business. Here are a few enlisted lender types from whom you can consider borrowing business loans:

-- Direct lenders like Banks, investors, and credit unions
-- Peer-to-Peer (P2P) Lenders like Local lenders and crowdfunding
-- Lending marketplaces where you can search for lenders depending on your necessities and get a business loan effortlessly.
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4.4. Gather the important documents required for a business loan

Irrespective of the lender you decide to apply for a business loan, make sure you have all the documents sorted in order. Here is the basic list of documents generally required for applying for a business loan in India-

-- PAN card [individual or company]
-- Identity proof [Passport, Aadhar card, or driving license]
-- Address proof [Aadhar card, passport, PAN card, driving license, or voter ID]
-- Last 3-6 months' bank statement
-- Business ownership document
-- The last ITR with the details of income computation, balance sheet, P&L account, etc.
-- Additional documents such as a sole proprietorship declaration, copy of the partnership deed, etc.
-- GST verification certificate

5.5. Decide on the security/guarantee to be provided

For a lender providing a business loan in India, one of the crucial concerns is to determine whether the borrower is capable of repaying the loan amount with the accrued interest. Hence, you should carefully decide which asset can be utilized as collateral for the business loan. Here are the general perspective assets that can be used as collateral to get a business loan:

-- Personal investments in mutual funds, bonds, and jewellery
-- Real estate [residential or commercial]
-- Expensive machinery
-- Inventory

6.6. Identify the key terms accompanying the business loan 

As a precautionary action, you need to figure out major financial terms that have been kept forward by the lender before sanctioning your loan application. In fact, it is recommended that you give the following aspects a quick shot-

-- Check out the interest rate charged for specific business loan amounts and whether it will remain the same throughout the loan tenure
-- Carefully read how the principal amount is split over the repayment years
-- Determine the processing fees to be incurred after loan approval
-- Discover about the lender if asking for any additional fees
-- Think about the penalties you might incur for not paying the loan amount on time

7.7. Use a business loan calculator

Before applying for a business loan, identify your financial situation to handle a business and decide on the possibility if you will be able to pay back the loan within the stipulated time. If you come with a YES, then figure out how much loan amount you can afford to borrow without burdening your finances. The simplest way to guarantee approval is to reinforce the exact loan amount you can manage to borrow. 
You will find different lenders hosting online business loan EMI calculators free of cost. Go to the lender’s website, fill in your desired loan amount and tenure and the loan calculator will give you the accurate amount of EMIs you have to pay based on the interest rates. 
Remember that your monthly income needs to ideally balance the sum as the lenders generally evaluate creditworthiness based on income, as mentioned above.

8.8. Apply for it

Once you are satisfied with the legitimacy of the lender and assured of all the loan-related terms, now you are ready to proceed with filling out the business loan application form, maybe offline or online, depending on your choice. Carefully fill in the information in order to avoid any complications later.

Conclusion  

Different types of Business Loans can help you to start or grow your organization. However, understanding the entire procedure and lending criteria might seem complicated if you are not familiar with how you will secure a loan. In simpler terms, you should understand the eligibility, find the perfect lender, and learn how you can apply for a small-business loan, and henceforth you will be able to successfully acquire the cash your firm needs. 

Also, applying for a business loan might be complex for small to mid-sized enterprises, still don’t worry. There’s a chance that you may quickly obtain a loan in India with a systematic approach while pursuing a well-crafted application. Jot down a few essential tips that you can consider when applying for a business loan:

-- Maintain a curated list of loan eligibility requirements on hand
-- Be ready with a comprehensive business plan
-- Streamline your company’s past performance
-- Accurate with personal financial information regarding partners, directors, or authorities if applicable
-- The most important factor is your credit rating
-- Inform the lender beforehand if you have a history of repaying a loan

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