How Large A Business Loan Can I Get?
If you're looking for a business loan, you may wonder how much you can borrow. In this article, we explore how lenders determine the loan amount for a business loan, including factors such as credit score, business revenue, collateral, and industry type!
The thought of starting a small business often crosses our minds. Be it starting a food truck or even a designer boutique outlet, discussing such ideas are common among friends and during family gatherings because startup has become a buzzword in India.
In addition, the reach of social media has made it easier for entrepreneurs to directly connect to the masses, right from testing a new product or expanding the business by launching additional products. But, securing adequate funding often is a challenge.
In fact, the lack of timely capital becomes a roadblock for potential businesses to come to the market. It also comes in the way of some of the established small businesses from scaling their operations. Small businesses, which are in growth phases, need funding at a relatively cheaper cost for a variety of reasons such as renting a new workplace, hiring additional staff, investing in machinery, or advertising for their products and services.
The government has launched a number of schemes to help such entrepreneurs, from rural areas to metro cities, get easier access to funding. The process of getting a business loan has become easier and many lenders offer a business loan of up to Rs 50 lakh, depending on various conditions and eligibility criteria.
Many banks and non-banking finance companies also recognise the contribution of micro, small, and medium enterprises. In addition to giving funding under various government schemes, these lenders have also designed many business loan schemes to meet the capital needs requirements of such entrepreneurs.
Business loans can be availed for amounts ranging from a few lakh rupees to several crores and higher. The amount also depends on the nature of the business, years of operations, whether it is profit-making, turnover, etc. In addition, cash flow statements, taxation documents, and registration documents are also essential.
Under the government’s MUDRA loan scheme, small manufacturing enterprises, shopkeepers, vegetable vendors, artisans, and those with business in farms and related activities such as food processing, and dairy are eligible for loans of up to Rs 10 lakh. Most of these businesses are outside the formal banking system and hence find it difficult to get access to finance. Though not categorised as a business loan, the MUDRA loan aims to plug the financing gap and encourage entrepreneurship.
MUDRA loans are extended by banks, NBFCs, and other financial institutions under three categories – Shishu, Kishore, and Tarun. Under Shishu, entrepreneurs who are starting a new business or require lesser funds, get loans of up to Rs 50,000, while under Kishore, entrepreneurs can get loans starting from Rs 50,001 to up to Rs 5 lakh. Under Tarun, small businesses are eligible to get loans up to Rs 10 lakh.
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Banks, NBFC Support
As businesses mature, the funding requirements go up. This is where banks and NBFCs. Most lenders offer business loans to self-employed individuals, proprietors, and firms operating in the areas of manufacturing, services, and trading. Leading banks offer such loans amounting to up to Rs 50 lakh without insisting on collateral. There are banks who also make it mandatory to furnish collateral, which can be in the form of exclusive mortgage charges on land and building as well as cash equivalent like lien/charges on fixed deposits and mutual funds.
Other than working capital loans, which are given to run daily operations and are short-term in nature, lenders also offer term loans that have usually longer repayment tenures. Lenders also provide an overdraft facility, where firms can withdraw money till the sanctioned limit without having adequate balance. The excess amount is equivalent to a business loan, and the same can be repaid by depositing the said amount along with the applicable interest rate.
While most lenders offer collateral-free business loans, they often keep certain eligibility criteria such as threshold on turnover, minimum annual income, etc. The interest rate on business loans currently starts from around 10% and goes up to 25% across banks and NBFCs. Lenders also charge a processing fee that can go up to 3%.
The repayment schedule is typically between 12-60 months. However, most banks allow part-payment or foreclosure only after payment of a specific number of EMIs.
Lenders have designed specific loan products for MSMEs registered under GST to meet their working capital requirements. While these are not specifically tagged as business loans, they are loans given to MSMEs for the expansion of business. Such businesses can apply for loans ranging from Rs 10 lakh to Rs 5 crore under the government-backed PSBloansin59minutes.com, which is an online marketplace for self-employed individuals to apply for loans.
Though the scheme is run by Small Industries Development Bank of India, the loan is disbursed by banks as well as NBFCs. Borrowers need to provide GST registration details, income tax returns of at least one year, and the last six months of bank statements to apply for such loans.
Technological innovation has given birth to a number of new businesses. In addition, encouragement to startups and small businesses has led to an atmosphere of flourishing entrepreneurship among many youths, from metro cities to rural areas. Banks and NBFCs like IIFL Finance are supporting such businesses by extending adequate and timely credit for them to scale to a new height.
IIFL Finance provides both secured and unsecured business loans to help MSMEs meet their financial requirements for short and long terms. The leading NBFC offers unsecured business loans of up to Rs 30 lakh for as long as five years. It also provides secured business loans of up to Rs 10 crore for as long as 10 years at competitive interest rates.
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