What Is a Small Business Loan and How to Apply?

Role of Small Business Loans in Economic Growth

India has made significant strides in creating a supportive environment for entrepreneurs. With various government initiatives and reforms, starting and running a business has become more accessible. Small Business Loans play a vital role in this growth, offering financial support to entrepreneurs for expansion, working capital, and other needs. These Business Loans for small businesses ensure that entrepreneurs have the resources to thrive in a competitive market.

What Is a Small Business Loan?

A small Business Loan is a financial product designed to provide funding to small and medium enterprises (SMEs) for various needs like expansion, purchasing inventory, or managing cash flow. In India, small businesses are defined by their investment and turnover, with enterprises having an investment of less than ₹ 10 Crore and a turnover of under ₹ 50 Crore falling under this category.

With fully digitised processes, Business Loans for small business have become more accessible, enabling entrepreneurs to address financial challenges efficiently. These loans are a lifeline for businesses aiming to scale operations, tackle liquidity crunches, or invest in growth opportunities.

Why Do Small Businesses Need Loans?

Here are common reasons why small businesses seek small Business Loans:

• Starting a New Business: Initial funding to cover setup costs and operational expenses.
• Expanding Operations: To open new branches, diversify products, or upgrade facilities.
• Purchasing Inventory or Equipment: To maintain stock levels or invest in machinery and tools.
• Managing Cash Flow: To ensure smooth operations during periods of low revenue or unexpected expenses.
• Hiring and Training Staff: To scale the workforce or improve employee skills.
• Marketing and Promotions: To invest in campaigns and boost visibility.

How Do Small Business Loans Work?

Small Business Loans function as follows:

1. Application: Submit a loan application online or offline with relevant details and documents.
2. Assessment: Lenders evaluate the business’s creditworthiness, financial stability, and repayment capacity.
3. Approval: The loan amount is sanctioned based on the business’s needs and eligibility.
4. Disbursement: The loan amount is credited to the borrower’s account and is ready for business purposes.
5. Repayment: The borrower repays the loan in EMIs over a fixed tenure, with interest.

Benefits of Small Business Loan

• Access to Capital: Provides the necessary funds for growth and operations.
• Flexible Repayment Options: Tailored loan tenures to match business cash flow.
• No Collateral Required: Many lenders offer unsecured loans, making them accessible to more businesses.
• Fast Processing: Online applications and digitized processes ensure quick approval and disbursement.
• Improved Credit Score: Timely repayments boost the business’s credit profile.

Things to Consider When Applying for a Small Business Loan

• Loan Purpose: Clearly define why you need the loan and how you’ll use the funds.
• Eligibility: Check the lender’s criteria, including turnover, credit score, and years in business.
• Interest Rates: Compare lenders to find the best rates for your loan.
• Repayment Terms: Understand the EMI structure and choose a tenure that suits your cash flow.
• Required Documentation: Ensure you have all necessary documents like financial statements and KYC proofs.

Types of Small Business Loans

1. Term Loans
   Lump-sum funding for long-term investments, repayable over a fixed tenure.
2. Working Capital Loans
   Short-term financing to manage operational expenses like salaries and rent.
3. Equipment Loans
   Funds for purchasing or upgrading machinery and tools essential for business operations.
4. Invoice Financing
   Advances offered against unpaid invoices to improve liquidity.
5. Overdraft Facilities
   Flexible credit allows businesses to withdraw funds beyond their account balance.
6. Startup Loans
   Specially designed for new businesses with limited financial history.

Why Should You Apply for a Small Business Loan?

Here’s why small Business Loans startup or established businesses can be the perfect solution for entrepreneurs:

• Expand Operations: Shyam, a grocery store owner in New Delhi, used a small scale Business Loan to transform his shop into a small supermarket and meet evolving customer demands.
• Upgrade Infrastructure: Loans can help upgrade your shop, office, or factory to meet market trends and preferences.
• Access Hassle-Free Financing: Numerous options, including public and private banks and NBFCs, offer small Business Loans startup without collateral.
• Customized Loan Solutions: Tailored loans allow you to choose terms that suit your needs, such as tenure, loan amount, and interest rate.
• Competitive Interest Rates: Institutions like L&T Finance offer loans starting at a small Business Loan interest rate of 15.5% annually.
• Preserve Existing Assets: Loans ensure you don’t need to dissolve savings like fixed deposits or gold for business expansion.
• Ease of Application: Applying for a loan is now simple, with fully digitized processes and minimal documentation.
• Multiple Lending Partners: You can choose from public banks, private banks, or NBFCs to find the best loan terms.
• Transparent Charges: Be mindful of additional charges, such as processing fees, which can be up to 5% (+ GST) of the loan amount.

If you’re wondering how to get a small Business Loan, thorough research and comparison will help you find the most suitable lender to achieve your goals. With L&T Finance, you can secure up to ₹ 50 Lakh for a maximum tenure of 60 months with ease and transparency.

Small Business Loan Eligibility

If you are seeking a loan for a small business, L&T Finance lays out simple eligibility conditions like

• The age of the applicant should be between 24-70 years.
• The company's turnover should be above 80 Lakh but should not exceed 250 Crore.
• The applicant should be doing business for a minimum of 3 years.
• The business should be profitable for at least 2 years.

How Can I Apply for a Small Business Loan?

If you are wondering how to get a loan for a small business in India, you should first understand the documents required:

1. PAN details - all individual/Proprietor/Directors/Partners (In partnership firm or Ltd or private Ltd entity, all partners/directors hold 10% or more) 2. KYC of Entity and co-borrowers 3. Business continuity proof for three years

You will also need to submit documents depending on the program:

• ABB Program - bank account statements of 6 months
• Income Program - eligible income proof, such as the last 2 years' filed income tax returns, profit and loss statements, and audited balance sheets. The income-related documents should be carefully prepared, ideally under the guidance of a chartered accountant, to ensure the smooth processing of the loan. Additionally, you must submit proof of filed GST returns and attached bank account statements.
• GST Program - of bank account statements of 6 months, 12 Months GSTR-3B

However, the suitable old method of physical loan application is also available for those who need to be technology savvy. You can visit your nearest L&T Finance branch, call or email with your eligibility documents, and apply for a small Business Loan in India.

Conclusion

India is progressing towards being self-reliant in many fields. As opportunities to contribute to the country's growth are opening up quickly, small businesses should leverage their positions and grow alongside. To scale up, you may require funds. Availability of a collateral-free, small Business Loan is an easy and instant process. Let LTF be your guiding light and growth partner in the journey of unlimited possibilities through our customized Business Loan.