Small Business Loans Financing – Types, Benefits, Features, Documentation, Fees & How to Apply?

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A major component of the Indian business scenario comprises of SME and MSME which, contributes almost 50% of our GDP. Businesses in this segment need funds to establish, operate, expand and diversify. Usually people look for startup business loan without collateral or even unsecured business loan for startup in India. Here we are going to focus on what are the advantages and benefits of small business financing, how to apply small business loan, types of business loan along with understanding eligibility criteria, application process, fees and charges, required documentation for small business loan and more.

Funding is intrinsic to a business enterprise which caters to the demand and supply cycle to generate profits in the end. While business loans are the lifeline of any business, it is prudent to explore every type of fund source, especially for the startups and those who do not have the means for providing collateral for small business loans.

Types of Small Business Loans / Financing

There are primarily two types of small business loan or financing options, they are; debt and equity. You should also read more about topics what is debt financing with examples and what is equity financing with examples. Let us take an overview on these two types of small business financing option to understand better.

Small Business Loans How to Apply? Small Business Financing - Types Benefits Features Eligibility Criteria Documentation Fees Charges
  • Debt: It is either a loan or a line of credit which provides a set amount of fund for a stipulated timeframe within which the lender repays it. Loans can either be secured or unsecured. Secured loans require that the borrower submits his/her assets to get the loan. An unsecured loan is money without any collateral. In lieu, the borrower has to bear interest on the borrowed fund.
  • Equity: It is selling a percentage of ownership to the investor. No money is required to be paid back as the shareholder earns a part of the profit.

Regardless of the size of company, mostly all business loans are either categorized with debt financing or equity financing or even a combination of both these financing options as well.

Where can I get Loan for Small Business?

There is a host of ways to finance a business. Whether it is a new or existing business aiming to operate, scale up its operations, launch new products, expand or diversify. You can also think of best equipment loans for startup businesses as well. Let us take a look at least nine ways to raise funds for the business. 

Savings

Many entrepreneurs fall back upon lifetime savings to start a business or operate an existing one. Though inevitable at times, partially if not fully, it liquidates assets, which is best left untouched for emergencies.

Friends and Family

This is often relied upon as a group of relatives and friends chip in with funds, which are also loans to be repaid over time.

Crowd Funding

Small amounts are raised from a large group of people known or strangers to kick-start a business. A goal is set for raising a target sum of fund in a specified time frame without assured returns.


Angel Investors

They are private individuals or groups who invest in a business as a form of equity purchase. It can help start and grow a business which has future potential for returns.

Venture Capitalists

Very similar to an Angel Investor, they are Equity Investors who are ready to fund startups or existing companies who do not have access to equity markets. The primary criterion is high growth potential.

Credit Card

It is one of the popular modes for raising funds for your business. But there is risk involved in this source and makes a hole in the pocket.

Pledge Future Earnings

Online marketplace exchange upfront as advance which is a percentage of future earning

Term Loan

Banks and Fintech offer business loans for a fixed sum disbursed in a single tranche to be repaid in a fixed time frame.  These small business loans are either secured or unsecured.


Line of Credit

It is an overdraft facility which allows free withdrawal and repayment to the extent of approved limit. Since interest is applied only on the withdrawn fund and for the period of use, there is a substantial interest saving.

Advantages / Benefits of Small Business Loan

You should first know how to start a business from scratch and then you can start thinking on financing options. The most popular mode of raising finance for business is savings and family and friends, but it has multiple limitations, the primary of which is the quantum. Thus, to overcome this deficiency, the best option is small business loans from banks and NBFC. There are many customized products in the small business loan class, but of late, Fintech companies have changed the contours of lending through innovations, optimal use of technology and reliance on real-time financial data to ascertain creditworthiness.

Salient Features of Small Business Loans

You can also explore sources of working capital finance as well. Riding on their fresh approach to lending, Fintechs offer a range of attractive features to woo small businesses. Some of the redeeming features are:

  • Generous unsecured loans up to INR 1 Crores.
  • Fair rate of interest.
  • Quick online processing of loan and disbursal within 72 hours.
  • Transparent transactions without any hidden charge.
  • Flexible repayment tenors and terms.

How to Qualify for a Small Business Loan?

Though it varies across lenders, some of the Fintechs offer liberal terms for unsecured business loans to suit specific needs. Let us see the eligibility criteria for small business loans below:

  • The age of business should be minimum six months.
  • Quarterly turnover should exceed Rs.90000.
  • The business should be legitimate.
  • NGO, Trust and Charitable Institution owners are excluded.

Small Business Requirements Document

Unlike banks which entail hefty documentation and stringent norms, Fintechs by dint of their liberal use of technology rely on essential simple documentation. Some of the basic documentation required for small business loans are:

  • KYC Documents of the owner and the business which includes PAN and Aadhaar card.
  • Proof of business existence with registrations and compliance of other legal formalities.
  • Bank statement for the preceding six months.
  • Any other document specified by the lender.

How to Apply for a Small Business Loan?

You should always think about how to get financial freedom for next 20 years before applying to any loans. Use of the digital platform is common in both banks, and Fintechs for loan application. However, Application process for small business loan in the case of banks, it can at best be described as the expression of interest, whereas Fintechs have made the entire cycle online. It can be completed in a few simple steps.

  • Online submission of application form with personal, financial and proposed loan details.
  • Upload of requisite documents in digital format.
  • Evaluation of the application, documents and approval by the lender.
  • Loan offer acceptance and disbursal of loan.

Small Business Loans Fees and Charges

You should also understand pros and cons of debt financing vs equity financing as well. Let us see This is a crucial factor that impacts the cost of borrowed fund with multiple financial implications of the bottom line of business. Let us observe some of the fees and charges applied to small business loans below:

Features determining the cost of funds received through Small Business Loan:

Rate of Interest 1%to 2% per month
Processing Fee Upfront 1%to 2% of the loan amount
Pre-payment Fee Nil
Tenor Maximum 36 months
Loan amount Rs.50000 to Rs. 2 crores.
Repayment EMI or Fortnightly.

Conclusion

Fund requirement is intrinsic to any business venture. Here you know how to get startup business loan without collateral or even unsecured business loan for startup in India. While there are many options for raising funds spanning personal, investors and business loans from lenders, the last option is the most advantageous. This would have given you good understanding on advantages and benefits of small business financing, different types of business loan along with how to apply small business loan. Most important understanding eligibility criteria, application process, fees, charges and required documentation for small business loan. The scope of personal sources is limited and risky, investors look for returns while institutional lenders and Fin-techs offer attractive customized products.

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