Types of Business Loans Available to Entrepreneurs and SMEs in India

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Lack of funds is a common area of concern for entrepreneurs who are just starting out and SMEs/MSMEs in the country. One way to solve this problem is by availing a business loan from an authorised lender in the country. With the number of businesses growing significantly each year, lenders, today, offer a range of different business loans for varied purposes. In this article, we will look at the different types of business loans that can be availed by SMEs and entrepreneurs in India.  

  1. Working Capital Loan 

A working capital loan is especially catered to business owners who require funds to finance the working capital needs of their business. You can avail a working capital loan from a lender if you need funds to pay your suppliers, purchase raw materials, pay for overhead costs, maintain a minimum amount of cash on hand, etc.  

A working capital loan can help stabilise your cash flow, manage fluctuations in sales and keep your business running, and allows you to leverage business opportunities, among other things. Most working capital loans are unsecured, which means prospective borrowers will not have to submit collateral to the lender.  

  1. Pradhan Mantri Mudra Yojana (PMMY) 

The Government of India offers a financing scheme called the Pradhan Mantri Mudra Yojana (PMMY). Commercial banks, small finance banks, co-operative banks, non-banking financial institutions, and MFIs offer the Mudra loan as part of their product portfolio. Under the PMMY scheme, there are three products – Shishu, Kishore, and Tarun.  

Those who opt for the Shishu loan option can borrow up to Rs.50,000, while those who choose the Kishore loan option can borrow any loan amount between Rs.50,000 and Rs.5 lakh. Under the Tarun option, applicants can borrow between Rs.5 lakh and Rs.10 lakh. Funding is offered under this scheme without the applicant having to submit a collateral.  

  1. Business Term Loans 

A business term loan, as the name suggests, is a loan that is availed for a certain pre-defined tenure. Borrowers can use the funds received through the loan to increase their working capital, buy a larger office space, purchase machinery for one’s business, etc. Business term loans can be unsecured or secured, based on the lender’s terms and conditions.  

The loan tenure for business term loans usually ranges between 12 months and 60 months. While the exact loan amount that you can borrow will vary based on the lender’s terms and conditions, most banks and financial institutions will allow applicants to borrow up to Rs.30 lakh. The key benefit of borrowing a business term loan is that there is no restriction on how you can utilise the disbursed loan amount.  

  1. Equipment/Machinery Loan 

An equipment loan or machinery loan can be availed if you wish to purchase or upgrade your machinery/business equipment. You can also borrow this loan if you require funds to repair faulty equipment or upgrade your machinery. Most lenders who offer equipment/machinery loans will not require you to submit collateral or security to avail the loan.  

The loan amount that you can borrow will vary from lender to lender. The upper limit, however, is likely to go up to Rs.25 crore, if not more. In many cases, individuals who wish to avail the equipment/machinery do not have to submit any collateral to the lender.  

  1. SME and MSME Loans 

SMEs and MSMEs contribute significantly to the nation’s GDP. As a result, a number of banks and financial institutions in the country offer SME/MSME loans to promote such enterprises. You can avail an SME/MSME loan to meet the working capital needs of the business, pay for overheads, install new machinery, or to invest in your establishment’s infrastructure, among other things.  

SME/MSME loans are, in most cases, collateral free. A number of lenders give applicants the option to apply for these loans online. Prospective borrowers can opt for any loan repayment term between 1 and 5 years. Lenders usually offer a quick and hassle-free loan application process. Most lenders that offer these loans also charge a competitive rate of interest on the loan amount.  

Benefits of Business Loans 

If you have a business requirement for which you require funds, it is smart to apply for a suitable business loan. A few benefits of business loans are as follows: 

  • Accessible: A number of leading lenders like HDFC Bank, Tata Capital, Bank of Baroda, Bajaj Finserv, State Bank of India, etc., offer business loans with attractive terms. Further, many of these lenders offer multiple types of business loans. Thus, you can assess your needs and opt for a business loan that meets your requirements.  
  • Easy Repayment Options: For most business loans, lenders offer a loan repayment term between 1 year and 5 years, during which period you will need to pay EMIs toward the loan. Prospective borrowers can, thus, assess their repayment capacity and choose a loan term accordingly.  

  • Minimal Documentation: In the case of business loans, the documentation process is fairly simple. Also, if you apply for a business loan online, it is likely that you will have to upload and submit the required documents online through the lender’s website, thus making the entire process paperless. 
  • Timely Disbursal of Funds: Once an individual’s loan application is verified and approved by the lender, the loan amount will be disbursed into their account immediately.   
  • Reasonable Charges: Most banks and financial institutions offer business loans at low rates of interest in order to provide financial aid to upcoming enterprises and entrepreneurs.  
  • Unsecured Loans: Most business loans that are offered are unsecured, which means you can borrow a business loan from a lender without having to provide security or collateral to the lender.  

If you are in need of funds to pay for your business-related expenses, you should consider borrowing a business loan. Given the various types of business loans that are offered by lenders, it is in your best interest to do your due research and check which type of loan to apply for. Once you decide on a particular type of loan, ensure that you check the interest rate, the payable EMI, and the other charges levied by the lender to know whether the loan suits your repayment capacity. You should also familiarise yourself with the terms and condition of the loan before you apply for a business loan.