
In India, small and medium businesses are considered the lifeline of the economy. These businesses create jobs, increase productivity, and capitalise on growth opportunities. There are around 42.5 million SMEs in India – registered and unregistered. According to reports, 95 percent of industrial units are small businesses, contributing 40 percent of the total industrial output.
In recent years, the biggest challenge impeding the growth of small businesses is the lack of access to capital. The Indian government has launched numerous schemes to help small businesses, providing collateral-free financing options. Small business loans come with numerous benefits and offer the working capital needed by small businesses.
What are Small Business Loans?
Small business loans are funds provided to small businesses and entrepreneurs for various purposes. These can include the expansion of business, increasing the cash flow, or upgrading your inventory. Furthermore, small business loans are typically unsecured loans, and the Indian government has launched various schemes to help small businesses avail of easy credit.
Thus, small business loans are extremely important for entrepreneurs and new business owners to access capital and fuel their business growth. These loans come with flexible repayment periods and a hassle-free application process.
Types of Small Business Loans
Small business loans come in different types. The main ones are highlighted below.
Government-backed Loans: As previously mentioned, the Indian government has launched various schemes to make credit easily attainable for new businesses and entrepreneurs. A few examples of these loans include the MUDRA loans, Stand-Up India, and the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE). Business loan interest rates of these schemes are nominal, and these loans do not require collateral.
Microloans: Microloans are small-sized loans offered by microfinance institutions and NBFCs to small businesses. These are ideal for individuals who do not have access to traditional banking services. Microloans are typically used for starting small businesses, and these are smaller amounts that come with shorter repayment periods.
Working Capital Loans: As the name suggests, these small business loans are provided to cover the day-to-day operational expenses of a business. These loans can be used to cover salaries, overhead costs, and inventory. These are short-term loans that can help businesses maintain smooth cash flow cycles.
Term Loans: Term loans are provided by financial institutions for a fixed duration. These loans are ideal for small businesses that need capital for long-term investments, such as purchasing equipment or expanding operations.
Equipment Loans: These loans are designed for small businesses to purchase or lease equipment. Typically, the equipment being purchased can be used as collateral in such loans.
Business Line of Credit: These are flexible loans that businesses can avail of from financial institutions. These loans provide small businesses and entrepreneurs with a pre-approved credit line, which they can utilise when required. Furthermore, you only pay interest on the portion you use from the credit line, regardless of the sanctioned limit.
Benefits of Availing of Small Business Loans
The benefits of getting small business loans are provided below.
Easily Attainable: New companies can easily avail of small business loans from banks, NBFCs, and government-backed schemes. New companies can use these funds to purchase office spaces or materials.
Flexible Repayment Options: Small business loans have flexible repayment options – from customised EMI payments to long or short repayment periods. The repayment terms can be personalised depending on the borrower’s repayment capacity. This allows small businesses to better manage business cash flows and make timely repayments.
Simple Application Process: Banks and NBFCs have made it extremely easy to apply for small business loans online. With minimal documentation requirements and a quick loan application and approval process, borrowers can avail of loans quickly.
Nominal Interest Rates: The business loan interest rates depend on various factors, including the loan amount, borrower’s repayment capacity, and credit profile. That said, small business loans come with low-interest rates so that borrowers can repay their debts on time.
Quick Disbursal: As the entire process is paperless, borrowers starting a new company can receive the loan amount fairly quickly. This allows them to plan ahead and factor the loan amount into their working capital.
Unsecured Loans: Small business loans are typically collateral-free loans. Most banks and NBFCs only ask for collateral if the loan amount is substantial.
Tax Relief: The Income Tax Act has provisions to provide tax benefits to the borrowers of small business loans. The interest paid on such loans is eligible for tax deductions.
Ideal for New Companies: Small business loans allow new companies to gain a competitive edge, as these funds can be used to launch a marketing campaign. You can also use these funds to purchase or upgrade inventory.
Wrapping Up
Small business loans provide numerous benefits to new and already established companies and offer easy access to capital. These loans can cover start-up costs, including buying inventory, leasing a commercial space, or hiring new employees. Furthermore, small business loans can enhance cash flow management and help maintain smooth business operations.