What is a Small Business Loan?

Perhaps the biggest challenge faced by startups and small business owners is arranging capital to cover their expenses and investment in crucial resources. This is where small business loans shine bright as a financial tool that assists small businesses in their growth and development.

If you are planning to take a small business loan, this blog is especially designed for you. We will discuss what exactly start-up business loans are, their types, eligibility criteria to avail of such loans, along with highlighting many other important details for the same.

So, without any further delay, let us dive in!

Understanding Small Businesses

Before moving further in the blog, it is important to discuss which type of business comes under the category of small businesses in India. So, any privately owned business with a smaller scale of operation can be seen as a small business or start-up. It  can be owned independently or through partnerships.  
 

Moreover, small businesses are sometimes also categorised as MSMEs. Here arises the question, ‘What is MSME?’

An MSME is an acronym for Micro, Small, and Medium Enterprises. These classifications are based on the annual turnover and investment expenditures of a business. Here is how they are classified:

• Micro Enterprises: Annual turnover up to ₹10 lakh. Further, investment in plant and equipment up to ₹25 lakh.
  
  
• Small Enterprises: Annual turnover between ₹10 lakh to ₹50 lakh. Further, investment in plant and equipment between ₹25 lakh and ₹5 crore.
  
  
• Medium Enterprises: Annual turnover between ₹50 lakh to ₹250 lakh. Further, investment in plant and equipment between ₹5 crore and ₹10 crore.
   

Many financial institutions offer MSME loans for new business depending on these traits.

What is a Small Business Loan?

Earlier, getting a loan as a small business owner was next to impossible. Most banks and financial institutions were hesitant to lend large amounts of money to start-ups due to their low creditworthiness and the huge risk they carry. For these reasons, the idea of starting a business was only reserved for people with generational wealth or someone with powerful contacts in the finance sector.

But today, the scenario has changed completely. The Indian government and reputed banks in India have recognised this need for easy funding and launched loan schemes that are specially designed for small businesses and startups. This change has been introduced to encourage enthusiastic entrepreneurs and fuel up the country's economy.

A small business loan, as the name itself suggests, is a loan designed for small-scale businesses to help them grow and expand.

What is the Need for Small Business Loans?

Small business loans are intended for businesses that hold a strong growth potential. Following are the ways in which growing businesses can utilise the small business loan:
 

• Manage Inventory
  Inventory management is the most critical aspect for businesses that operate in the eCommerce and retail industry. If a company has too much stock, it has a risk of accumulating outdated products.
  
  On the other hand, too little stock can result in the loss of market value and goodwill. This is where reliable inventory management software becomes critical for the efficiency and performance of the business.
  
  However, such inventory management solutions are quite expensive and out of the reach of most small businesses. With a small business loan , purchasing a suitable inventory management system becomes possible. This, in turn, ensures smooth business operations and a steady growth of the business.
  
  
• Purchase Advanced Equipment
  High-quality and advanced equipment plays a pivotal role in ensuring the smooth functioning of a business. Although buying the latest equipment requires a lump sum investment, it benefits in the form of an impressive ROI.
  
  With a small business loan in your hand, you can buy the necessary equipment without worrying about your finances.
  
  
• Promote and Advertise
  Advertisement and promotion are indispensable for small businesses. It allows them to reach their target audience and establish a unique brand in the market.
  
  However, we cannot ignore the fact that the advertisement efforts can be heavy on your pocket. The good news is that you can use small startup loans for business to get the most out of your marketing efforts.
  You can run powerful marketing campaigns, hire PR agencies, and perform other advertisement activities without falling short on capital.

Types of MSME Loans for New Business

Depending on your requirements, you can avail of the small Business loan from a variety of sources such as banks, government schemes, and loans from other financial institutions.

Following are the main types of small business loans you can consider having:
 

• Small Business Loans from Banks: There are many reputed banks in India that offer small business loans to eager entrepreneurs in a quick and easy manner. The biggest highlight is some banks do not even require collateral for sanctioning such loans.
  
  
• Government SME Schemes: Government schemes like Pradhan Mantri Mudra Yojana Start-up India Seed Fund Scheme (SISFS) are other sources from which small-scale businesses can request loans.
  
  
• Term Loan: A term loan is used for expanding a business, purchasing new assets or modernising the existing ones. These types of loans usually come with a longer tenure and flexible repayment terms as compared to other loans.
  
  
• Working Capital Finance: As the title suggests, this loan is used for daily business operations such as importing and exporting goods, purchasing raw materials, and so on.
  
  
• Government-supported Special Schemes: Many specialised government schemes are available to encourage entrepreneurship in India. One such popular government support bank scheme is the Stand-up India Scheme for SC/ST and female entrepreneurs.
  
  Another example of this type of small business loan is the Emergency Credit Line Guarantee Scheme, which allows businesses affected by the COVID-19 pandemic to request loans to revive their operations.

Eligibility Criteria for Business Loans for Small Businesses

A business must meet the following criteria to qualify for a small business loan:
 

• The founder should be above 18-21 years of age, based on the source of the loan.
• The business must be based in India.
  
  

Apart from the points mentioned above, different banks may have more specific income-based requirements that can vary from one financial institution to another.

Some of those include manufacturing or trading licences, financial statements of the business, income tax certificates, and so on. On the positive side, these requirements are not very strict.

Final Thoughts

A smooth flow of capital ensures an obstacle-free growth and success of a business. But, if you are a small business owner, arranging this capital can be challenging. Thankfully, you can utilise small business or start-up business loans to run your business operations in an efficient manner.

We have discussed everything about small business loans in this blog. From what is MSME, what is a small business loan to why you need it. Now, take a step forward and avail the loan amount you need from any reliable financial institution we have discussed above.