Types of Loans Available for Small Businesses – Forbes Advisor INDIA

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Finding the right source of funding for your business can be difficult if you don’t know where to look for it. For entrepreneurs running small businesses, there are two ways to get loans: they can choose a government scheme or apply for a loan to private players.

Key government schemes include business loans for MSMEs for startups in 59 minutes, Pradhan Mantri Mudra Yojana and SIDBI Make in India Soft Loan Fund for MSMEs. Private players offer a variety of funding options, and each has a different application process and set of conditions.

Here are the loan options available for small businesses.

Government Loan Schemes for Small Business in India

The Indian federal government helps small and medium-sized enterprises (SMEs) grow through a variety of business loans that can be used under central and state schemes. The five main schemes for state lending to small businesses include:

Business loans for MSMEs for startups in 59 minutes

This small industrial loan, backed by the central government, is a popular scheme and was launched in 2018. Although the actual process may take eight to 12 days, the loan applicant is notified of the loan eligibility within 59 minutes.

To be eligible for this government business loan, you must have the following:

  1. Tax inspection of goods and services
  2. Related documents
  3. Customer details (KYC) and bank account history at least six months.

A loan under this scheme has an interest rate of 8.50%. In addition, interest rates depend on the nature of your business and your credit rating… This scheme offers loans ranging from a minimum of 1 lakh to a maximum of Rs 5 crore. For women entrepreneurs, a 3% reservation is provided for such loans.

Pradhan Mantri Mudra Yojana (PMMY)

The Microenterprise Development and Refinancing Agency (MUDRA) is an organization created by the Government of India to provide business finance to micro businesses. The Pradhan Mantri Mudra Yojana (PMMY), administered by MUDRA, is a small industry loan issued by the central government with the intention to “finance those who have not received funding”.

The PMMY scheme offers small business loans for a wide range of sectors and activities. MSMEs can use loans up to 10 thousand Indian rupees without collateral. This scheme is often referred to as MUDRA loans. Businesses in the non-corporate small business segment (NCSB), viz. all types of trade, manufacturing and service establishments can be applied, including but not limited to the following.

  • Fruit or vegetable vendors
  • Repair shops
  • Artisans
  • Small production
  • Truck operators
  • Small production units
  • Shop owners

SIDBI Make In India MSME Soft Loan Facility (SMILE)

This small business lending scheme is regulated by the Small Business Development Bank of India (SIDBI). SMILE is a government loan scheme of the Government of India that offers loans at below market interest rates, also known as concessional loans.

The minimum loan amount under this scheme is Rs 25 lakh. The interest rate starts at 8.36%, according to the scheme there is a moratorium for 36 months. The maximum maturity is 10 years. New MSMEs, along with existing service and manufacturing sectors, can apply for this scheme.

Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE)

This government loan scheme offers loans to small enterprises in the central government to the MSME sector. Under this scheme, working capital loans of up to INR 10,000 are provided without collateral. Lines of credit up to INR 1 crore can be provided after the land or assets of your business have been pledged.

New or existing MSMEs with services or production activities (other than retail), agricultural and educational institutions, and self-help groups are eligible to participate in this scheme.

Stand-Up India

The Stand-Up India Initiative, initiated by the Small Business Development Bank of India (SIDBI), aims to provide government loans to small businesses for women entrepreneurs and individuals in the Scheduled Caste or Tribal category.

Under this scheme, small businesses can take advantage of loans ranging from 10 lakh to Rs 1 crore. The loan amount will cover about 75% of your business project, and its interest rate is calculated as the marginal cost of funds based on the credit rate (MCLR) + 3% + real estate ownership premium.

Enterprises belonging to the manufacturing, trade or service sectors are eligible to participate in this scheme.

Private Company Loan Options for Small Business in India

Business credit line

It is a flexible business loan that allows the borrower to pay interest only on the portion of the money they borrow. As with a credit card, the borrower can borrow and repay funds as needed, provided they do not exceed their specific credit limit.

Small businesses that want to easily manage their cash flow, purchase inventory for a large order, or accommodate unexpected expenses will benefit from such a loan. Typically, these loans do not require collateral and are available from banks, non-bank finance companies (NBFCs) and financial technology lending institutions.

Working capital loan

It is a short-term business loan designed to generate cash flow to cover day-to-day expenses such as advertising, staff salaries, or purchasing inventory. Working capital loans can also be used to cover contingencies other than those available through a line of credit. These loans are available from banks, NBFCs, microfinance institutions and digital lending institutions and can be secured or unsecured.

Term loan

This can be provided or unsecured… Small businesses often use these loans from banks, NBFCs, microfinance institutions and digital lenders. The loan amount depends on the credit history of the borrower. These loans usually have a fixed term of one to five years if unsecured, or can go up to 15-20 years if secured.

Companies typically borrow these loans to cover capital expenditures to support business growth. Repayment is usually done through monthly EMIs.

Seller’s cash advance

This is another type of loan that makes life easier for small businesses. Here, the lender assesses the creditworthiness of the borrower by assessing their daily debit card sales or digital transactions and provides a cash advance. The borrower must then repay the loan as part of daily debit or credit card sales or digital transactions. The borrower must ensure that he has sufficient funds to manage payments.

Funding accounts

This type of loan is commonly known as factoring.

The principle of its operation is simple: the small business owner submits an invoice to the lender, and the lender provides the funds in return to pay the invoice. The loan interest rate and tenure period are fixed by the lender in advance and are often used by business owners when they have a time lag between invoices and payments.

Some other types of loans include real estate loans, equipment financing, overdraft, business credit card, etc. Factors such as required or not required collateral, interest rate and tenure, repayment terms, etc. Vary for each of the them.



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