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Starting a business is capital intensive, and business owners must have sufficient funds to cover all types of costs. These include business expenses, such as employee salary, merchant payments, buying machinery, workspace rent, and so on.
The initial stages of development are when businesses require maximum funding. Here, availing an MSME loan or any other form of a business loan can help. Depending on various business requirements, lenders provide umpteen options to cover the major financial requirements of a startup.
Read on to learn the types of loan options you can choose for establishing your startup, MSME loan eligibility criteria and the documents required.
Various Types of Loans Entrepreneurs Can Avail
Business loans are flexible to accommodate all entrepreneurial financial requirements. You can choose the right type of credit based on its features and benefits. To understand your choices, here are the types of business loan options you can avail.
Term Loan
A term loan is a traditional business loan where you get a lump sum amount from the lender that you need to repay over a fixed tenure. This type of loan is ideal for acquiring a large sanction or covering capital expenditure for buying equipment or commercial property.
Term loans may be secured or unsecured, depending on your credit score and tenure. If you take a term loan for a tenure between 1 and 5 years, you can opt for unsecured credit. On the other hand, taking a term loan for a tenure ranging from 15 years to 20 years requires you to pledge collateral.
Working Capital Loan
A business must have a steady cash flow to cover day-to-day needs, and taking a working capital loan is ideal in such instances. Using a working capital loan, business owners can fulfil all types of fund requirements when any payment is due or when there is a shortage of cash.
You can also use the working capital loan to buy supplies and materials when the demand and cash flow are high. This type of loan best suits small businesses and firms that have a lot of day-to-day expenses.
Loan Against Property
This is a secured type of loan where borrowers can pledge their property as collateral to get up to 70% of the property value as the loan amount. Lenders provide loans on both commercial and residential properties. You can take a loan against property for a maximum tenure of up to 20 years upon pledging any undisputed and litigation-free property.
Invoice Financing
Often, businesses experience delays in receiving payments while the bills continue to pile up. This can affect their cash flow and bring operations to a halt. To avoid this, entrepreneurs can avail the invoice financing or invoice discounting facility to clear any urgent bills.
This MSME loan is ideal if you expect to receive payments on a set schedule, as the funds are offered against invoices. You can get short-term credit at affordable interest rates, and you need to clear the outstanding when you receive the payment.
Equipment Lending or Machinery Loan
Equipment, machinery and tools are major expenses for any business. So, taking a loan to buy equipment can help to ensure other functions of your business aren’t affected.
You can get equipment or machinery loans to buy a new machine or upgrade an existing one with the latest technology. Here, the machinery acts as collateral to help you get a higher amount at lower interest rates.
Overdraft Facility
This loan is provided against an asset, like a fixed deposit, where banks and NBFCs set an overdraft limit after analysing your repayment capacity. This includes checking essential parameters, such as:
- Your business cash flow
- Credit history
- Any existing business loan you may have
- Your repayment behaviour
The borrower can withdraw the amount, as and when required, within this limit and has to pay interest only on the withdrawn amount. Some may even offer a line of credit or a similar facility, based on your profile.
Merchant Cash Advance
This MSME loan provides finance based on your credit or debit card sales, and you can take advance cash repayments per your capacity. The benefit of this loan is that you are not obliged to pay a fixed amount. For instance, you can repay a lower amount when the business is low.
Similarly, when the business is booming, you can settle your loan by clearing a significant portion of your credit. Remember that this is one of the most expensive options for financing when compared to other types.
Business Loans for Women
The number of women entrepreneurs is growing tremendously. To promote them, lenders and the government have launched a plethora of schemes. Women entrepreneurs can leverage the benefits of these loans to overcome financial hurdles and flourish in their respective verticals.
Stree Shakti Yojana, Annapurna Scheme, and Mudra Loan for Women are a few MSME loan schemes dedicated to women. Low interest rates, flexible repayment tenures, and hassle-free application processing are a few of the benefits these schemes offer.
Government Startup Loan Schemes
The Government of India has rolled out many credit schemes to encourage startups and micro industries. Under the ‘Make in India’ banner, many MSME loans are available with zero collateral, affordable interest rates, and minimal documentation requirements.
Some of the MSME loans offered by the government include Credit Guarantee Scheme, Pradhan Mantri Mudra Yojana, Coir Udyami Yojana, and much more.
Loan Eligibility Criteria for Micro, Small and Medium Enterprises
When availing a business loan, lenders verify your business’ financial standing to check if you can repay the loan without any defaults.
Here are a few common business loan eligibility criteria most lenders check for when giving loans to MSMEs and startups.
- You must be an Indian citizen
- You must be between 18 and 65 years of age
- You must have a CIBIL score of 685 or above
- The minimum business vintage required is 3 years
Document Requirements for MSME Loans
Here are the documents you must submit when applying for a business loan. Remember that these document requirements can vary across lenders.
- Aadhaar card, Passport, Voter ID card, or any other KYC document
- PAN card
- Balance Sheet copies of the last 2 years
- Income Tax Returns
- Project report
- GST Registration certificate
- Rental or lease agreement as business address proof
- Last 3 months’ bank statement
- Sound business plan in the case of a startup
Based on these business loan eligibility criteria, you get the financing you need to grow your enterprise. Since each loan option is designed to cater to specific business needs, you must evaluate your business requirement before applying for a loan.
