What Is The Best Source For Small Business Loans?

Every business requires money to run operations and there are essentially three ways to source it—capital, debt, and revenue generated from the venture itself.

Sometimes, the cash flow from sales may not be enough to sustain operational expenses such as payment of wages, overheads or purchase of raw materials. Also, capital raising is not an exercise that a business can do regularly if owners are unable or unwilling to inject equity.

This leaves businesses with the only option to source funds through debt or loan. While big firms have many ways to raise debt such as by issuing non-convertible debentures or borrowing from overseas, small enterprises can take out business loans.

In essence, a business loan is money borrowed by a firm or business from a bank or non-banking finance company (NBFCs) for a defined time and at a predetermined rate of interest.

Almost any legitimate business activity qualifies for a small business loan. It can be used to pay for working capital expenses, make an investment in a new project, purchase equipment, pay wages, spend on advertising, or any other purpose that can help to expand a business.

A business loan does not always require collateral or security, unlike a home loan or a car loan. A company loan can have attractive rate of interest if the proprietors have a solid credit score, and applying for such a loan can be simple and hassle-free, depending on where you are borrowing from.

Sources Of Small Business Loans

• Banks:

They have been the traditional source of small business loans for decades. However, banks have to follow many norms laid down by the Reserve Bank of India before advancing loans. The process of obtaining small business loans from banks can be slow and cumbersome due to high internal scrutiny of applications. Also, the requirement of turnover, minimum years of operations etc may be stiff, making such loans out of bound for many small businesses.

• Financial Institutions:

The government has set up many financial institutions to lend money for specific businesses such as power, tourism, infrastructure etc. These include IFCI Ltd, Power Finance Corporation Ltd and Small Industries Development Bank of India etc. But such government institutions also have stringent conditions for lending, making them mostly unsuitable for small business loans.

• Govt Schemes:

The government has come out with many schemes for small business loans, especially after the COVID-19 pandemic. These come in the form of loan or credit guarantee, under which the government will pay back the lender in case of a default by the borrower. Under the Credit Guarantee Scheme, the government backs loans of up to Rs 2 crore to micro, medium or small enterprises (MSMEs). These loans can be taken from state-owned banks, private banks, regional rural banks or NBFCs.

• NBFCs:

Non-banking finance companies have become one of the easiest sources of small business loans as approval procedures at banks are frequently drawn out and complicated, and their eligibility requirements are onerous. In contrast, NBFCs provide a more convenient method for obtaining personal loans with little documentation.

• MFIs:

Microfinance institutions, typically, bridge the gap between people who need loans and banks in rural areas. In underserved banking areas such as villages, MFIs help by giving loans that can be used for business also. However, the size of such loans is typically very small.

Conclusion

Every business is different. Therefore, the decision regarding which small business loan option is suitable for the firm must be made carefully. However, it is wise to draw a business plan and analyse and compare the terms and conditions of several lenders before applying.

You might choose to submit your loan application online for a quick and easy lending process. Lenders may request extra documentation after receiving the initial set of papers. The status of their loan application must be routinely checked, and applicants must respond promptly to requests for further information.

Numerous banks and reputable NBFCs like IIFL Finance provide business loans to satisfy a range of financial needs, from cash flow management to business expansion. IIFL Finance offers a wide range of loan solutions to meet various needs. Additionally, it provides a quick and easy process for sanctioning and disbursing the loan directly into your bank account, as well as the convenience of applying for a loan online.