Types of Loans Available for Small Businesses – Forbes Advisor INDIA


Finding the right source of funding for your business can be difficult unless you know where to look. For entrepreneurs who run small businesses, there are two ways to obtain loans: they can either opt for a government arrangement or request an emergency loan from private actors.

Major government programs include MSME Business Loans for Start-ups in 59 Minutes, Pradhan Mantri Mudra Yojana, and SIDBI Make in India Soft Loan Fund for MSMEs. Private actors offer a variety of financing options and each has their own application process and terms and conditions.

Here are the loan options available for small businesses.

Government loan programs for small businesses in India

The Federal Government of India helps small and medium-sized enterprises (SMEs) grow through a variety of business loans that can be used under central and state regimes. The top five government small business loan programs include:

MSME business loans for start-ups in 59 minutes

This central government-backed small-scale industrial loan is a popular program and was launched in 2018. Although the actual process may take eight to 12 days, loan eligibility is communicated to the loan applicant in up to 59 minutes. .

To be eligible for this government business loan, you must have the following:

  1. Goods and Services Tax Audit
  2. Related documents
  3. Know Your Customer (KYC) information and at least six months of bank account history.

A loan via this scheme benefits from an interest rate starting at 8.50%. Plus, interest rates are based on the nature of your business and your credit rating. This program offers loans ranging from a minimum of 1 lakh INR to a maximum of 5 crore INR. A 3% reservation for such loans is available for women entrepreneurs.

Pradhan Mantri Mudra Yojana (PMMY)

The Micro-Unit Development and Refinancing Agency (MUDRA) is an organization created by the Indian government to provide finance to micro-enterprises. The Pradhan Mantri Mudra Yojana (PMMY) administered by MUDRA is a small-scale industry loan granted by the central government with the intention of “financing the unfunded”.

The PMMY scheme provides small business loans to a wide range of industries and businesses. MSMEs can benefit from loans up to 10 lakh INR without collateral. This program is often referred to as MUDRA loans. Businesses in the unincorporated small business segment (NCSB), viz. all types of trading, manufacturing and service businesses, such as, but not limited to, the following may apply.

  • Fruit or vegetable sellers
  • Repair shops
  • Craftsmen
  • Small industries
  • Truck operators
  • Small manufacturing units
  • Tradespeople

SIDBI Make In India Low Rate Loan Fund for MSMEs (SMILE)

This small business loan program is governed by the Small Industries Development Bank of India (SIDBI). SMILE is a government loan program of the Indian government that offers loans at lower than market interest rates, also known as soft loans.

The minimum loan amount under this program is INR 25 lakh. The interest rate starts at 8.36%, the plan comes with a 36-month moratorium. The maximum repayment period is 10 years. New MSMEs, as well as existing service and manufacturing sectors, can apply for this program.

Micro and Small Business Credit Guarantee Trust Fund (CGTMSE)

This government loan program provides central government loans from small industries to the MSME sector. This program provides working capital loans of up to INR 10 lakh without any collateral. Credit facilities of up to INR 1 crore can be used after you mortgage your land or business assets.

New or existing MSMEs engaged in service or manufacturing activities (except retail), agricultural and educational establishments and self-help groups are eligible for this program.

Standing india

Launched by the Small Industries Development Bank of India (SIDBI), the Stand-Up India initiative aims to provide government loans to small businesses to women entrepreneurs and individuals in the category of scheduled castes or tribes.

Under this program, small businesses can benefit from loans between 10 lakh INR and 1 crore INR. The loan amount will cover around 75% of your business plan and its interest rate is calculated as the bank’s marginal cost of funds (MCLR) based borrowing rate + 3% + seniority premium.

Companies belonging to the manufacturing, trade or service sectors are eligible for this scheme.

Loan Options Via Private Companies For Small Businesses In India

Business line of credit

This is a flexible business loan that allows the borrower to pay interest only on the portion of the money that they borrow. As with a credit card, the borrower can withdraw and repay the funds they need, as long as they don’t exceed their specific credit limit.

Small businesses looking to easily manage their cash flow, buy inventory for a large order, or record an unforeseen expense will be well advised to take advantage of such a loan. Typically, these loans do not require collateral and are available from banks, non-bank financial corporations (NBFCs), and fintech lenders.

Working capital loan

This is a short-term business loan intended to generate cash flow to cover current expenses such as advertising, staff payroll, or inventory purchases. Working capital loans can also be used to cover emergency costs beyond those available through the line of credit. These loans can be obtained from banks, NBFCs, microfinance institutions and digital lenders and can be secured or unsecured.

Term loan

It can be secure or unsecured. Small businesses often use these loans from banks, NBFCs, microfinance institutions, and digital lenders. The loan amount depends on the credit history of the borrower. These loans usually have a fixed term of one to five years if they are unsecured, or can be up to 15-20 years if they are unsecured.

Companies tend to borrow such loans to finance their capital expenditures in order to support their growth. Repayment is usually made through monthly EMIs.

Merchant cash advance

This is another type of loan that makes life easier for small businesses. Here the lender assesses the creditworthiness of the borrower by evaluating their daily debit card sales or digital transactions and provides a cash advance. The borrower must then repay the loan with a portion of daily debit or credit card sales or digital transactions. The borrower should make sure that he has enough cash to handle the payments.

Invoice financing

This type of loan is commonly referred to as factoring.

The way it works is simple: a small business owner presents a bill to the lender and the lender in return provides funds to pay the bill. The interest rate and loan term are set in advance by the lender and are often used by business owners when they have a mismatch between bills and payments.

Some other types of loans include property loans, equipment financing, overdraft facility, business credit card, etc. Factors such as necessary or unnecessary collateral, percentage of interest rate and duration, repayment terms, etc.

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