If you’re in the need for funds for your business needs, using your savings to fuel your business may not be a smart decision. At such times getting a loan for a small business in India is the best way to go about it.
A small business loan is a type of unsecured (collateral-free) loan designed to fund businesses. Banks and non-banking financial companies provide such loans to help small business owners meet their needs, such as buying new stock, purchasing equipment, expanding office space, or paying for new staff.
How to apply for a loan for a small business in India?
While applying for a small business loan, you will have to check your lender’s eligibility criteria and the relevant documents. Several other factors play a crucial role in your loan application.
Here are the steps to apply for a small business loan:
Draft a business plan
The first thing you need before applying for a loan for small business in India is draft business plan. However, not all lenders ask for a business plan, they may ask to look at the business’s financials instead. Draft a business plan and submit it along with your application. It should contain details of your business and how you are going to use the loan amount to achieve your objectives.
You will also need to submit documents about your industry statistics, unique market advantages, and social presence. It helps your lender to decide how much you need and what should be the interest rate.
You will need to include the following documents:
- Personal and business ITR.
- Bank statements
- Financial statements
- Driving license
- Business license
- Articles of corporation
- Resume
- Financial projections.
Check your credit score
Since a loan for a small business in India is an unsecured type of loan, the lender will offer a loan based on your credit score. It plays a crucial role in loan approval. It is a three-digit number determined based on your credit history, length of credit history, credit utilisation, credit mix, and new credit. It enables the lender to determine whether or not you are a trustworthy borrower.
Most lenders require a minimum CIBIL score of 700 to get a small business loan. However, to get the best interest rates, you must maintain a CIBIL score above the said range. So, before applying for a loan, make sure to check your credit score and improve it if needed.
Assess your needs
It is worth noting that lenders expect borrowers to have a proper reason to get a loan. For example, you will need to establish whether you need a loan to new stock, purchase equipment, or wish to pay for new staff. Such reasons will speed up your application processing time. If you come with bad reasons like the acquisition of non-essential business assets, your application may get rejected.
So, before submitting your application for a loan for your small business in India, you must factor in your needs and the reasons behind opting for a loan. You will also have to convince the lender of your repayment capacity. It is imperative to knowing how much you need as a loan to avoid overestimation and losing credibility in the eyes of the lender.
Consider your business age
Most small businesses fail within the first few years. That is the reason lenders set a minimum business age requirement to apply for a loan. To secure a small business loan, you will need to be in the business for at least two years. Also, all lenders check how your business account has been open instead of how long it has been registered with the government.
Prepare and submit the required documents
Although the documents required to apply for a loan vary across lenders in India, here are the ones common across all platforms:
- Identification proof: Aadhaar Card, Driving License, or Voters ID Card.
- Address proof: Passport, Utility Bill, or Voters ID Card.
- Bank statement (for the past six months)
- Income tax returns (personal and business), Balance sheet, profit & loss account.
- Trade license, sales tax certificate
- Business registration documents: Sole Proprietorship Deed, Partnership Deed, Memorandum of Association, Articles of Association.
Availing a small business loan in India is easy as long as you meet the lender’s eligibility conditions and possess the necessary documents. So, help your business scale new heights with a small business loan.
