If you are in need of a loan to help get your business off the ground, then you may want to consider a small business loan.
There are many options available for small businesses, from government grants to person-to-person lending; unfortunately, this makes it harder for you to decide which one you should be going for.
With this in mind, we have written this guide detailing the best ways for you to obtain a loan for your small business.
1. Getting a Bank loan
As you are well aware, getting a bank loan is difficult wherever you are in the world. But India might be the toughest of them all, with 48.2% of people not even having access to a bank account, a necessary component of any bank loan.
And even if you are one of the lucky ones who has managed to obtain a bank account under the Pradhan Mantri Jan Dhan Yojana scheme for financial inclusion, odds are that you are one of the 69% percent of Indians living in the countryside, miles away from your nearest bank.
The bad news does not end there. According to P2P-Banking.com approximately 78% of Indians are unable to obtain a bank loan whatever their bank status or geographical location, as the collateral demanded by banks for any loan, is too high for most Indians to service.
This means you will most likely need to be employed and in most cases will have to be earning a salary of more than Rs 3 LAKHS, depending on your level of employment to stand a chance of getting a small business loan in India.
Per capita GDP in India currently stands at just under Rs 1 LAKHs, meaning that those who are eligible for a loan, are least in need of it. If you think that you would be eligible for a bank loan however, then take a look at the options below.
The State Bank of India offers several different finance options, including Discount Future Cash Flows, a Trader’s Loan, and the Star Udyami Samekit Loan, along with many more.
They are all basically the same thing: loans for small businesses but with various options depending on your business model.
For example, a term loan is designed for expansion, renovation, or for setting up a new venture, whilst a Trader’s Loan is intended for assets such as stock.
It is very important for you to sit down with an advisor in order to decide which finance option will benefit you the most.
The Bank of Baroda also offers loans for small businesses, such as Working Capital Finance; Small Business Borrowers; Micro, Small and Medium Business Enterprises Sector; and countless others.
Again, each loan is different; for example, the Small and Medium Business Enterprise loan will fund items such as machinery, factory land and construction; whilst Working Capital Finance will assist you with items such as raw material.
If you are running a fairly new business, it may be harder to obtain a bank loan, since banks like to see a record of your profits and losses before issuing credit.
The bank is the party that is taking on all of the risk, so expect them to want a fairly detailed and accurate report.
You should always ensure that your accounts are up to date and perfectly in order, not least because when you apply for a loan, it is very likely that a lender (especially a bank) will want to review your progress.
But is a bank loan the best way for you?
2. Government Grants
With Indian banks failing to meet the needs of small business owners, Government Grants have become the underwhelming alternative.
Attempting to aid entrepreneurs with the financing of companies, in order to foster employment opportunities the Indian Government set up the the Small Industries Development Organisation which runs various financing schemes.
These include the Credit Guarantee Scheme and the Microfinance Programme, along with countless others.
Entrepreneurship has been growing quite rapidly since 2000 and in reflection of this there are approximately 26 million Small Micro Business Enterprise Loans available to all businesses.
As the demand for small business loans in India has risen, the banks have developed a higher risk perception, as well as an increased insistence on collateral; this became a major cause of low finance availability and as a result the government introduced the Credit Guarantee scheme.
The aim was to provide collateral-free credit for small businesses. With the help of Small Bank Of India in 2000, the Credit Guarantee Trust Fund also became available. Working Capital Facility loans are available up to Rs 100 LAKHS per borrowing unit, with no collateral required.
The Micro and Small Enterprises Sector fund approximately 45% of the country’s manufacturing industry output and 40% of the nation’s exports.
The National Small Industries Cooperation is similar, allowing you access to a variety of loans, including equipment financing, raw material credit, financing for marketing materials and countless further options.
They also offer various means of support accessible through their Technical Service Centres, for example, advise on application of new techniques, material testing facilities in an accredited laboratories and technical queries.
A micro loan is a financial resource for those who do not have access to a bank.
These are small loans that are granted in order to help borrowers start a new business; however, these can take a while to pay back.
The concept was brought into India in 1992 and developed by the Nobel Prize Winner Muhammad Yunus, who created the Grameen Bank in Bangladesh.
3. Peer-to-Peer lending companies
Have you ever considered a person-to person lending company when looking for a small business loan in India?
Peer-to-peer lending takes place on an Online platform, where investors lend to borrowers. Usually, this would only work in countries like the U.S. or the U.K. where wealthy investors look for high yield alternatives to the banks.
So far, it has been impossible for investors from the U.S. or Europe to invest in loans from India, due to the high exchange and transfer fees. These would make any investment unprofitable, cancelling out any positive returns lenders might expect.
With the introduction of bitcoin, this changed. Bitcoin permits frictionless, borderless and bank-less transmission of funds instantly.
Peer to peer lending companies such as Bitbond have seized the opportunity and now provide a marketplace for peer to peer bitcoin lending to take place internationally.
This means that Indian small businesses can, for the first time, receive working capital from investors on the other side of the world at affordable interest rates.
These start at 7.7%, compared to the 9.7% charged by the Bank of India, and terms for loans can range between 6 weeks and 5 years. Using one of Bitbond’s exchange rate pegged loans, you can protect yourself from bitcoin’s volatility, and only repay exactly what you borrowed.
Besides the exiting prospect of getting the small business funding you need from investors located all over the world, Bitbond also offers you the possibility to prove your creditworthiness by connecting your online seller accounts. Included in these are eBay, Amazon, MercadoLibre and PayPal as well as Google Analytics for any website you might have.
This is a huge development from the p2p lending sites that blazed the trail in the United Kingdom in the early 2000s, and you can now profit from it.
Not just through the low interest rates but also through the almost negligible fee, amounting to only 1% of the loaned amount.
Conclusion – Small Business Loans In India
So as we can see, there are numerous options out there available in order for small businesses in India to obtain a loan, for example banks offer a variety of loans to choose from but because of the location of the bank and the vast size of the country it may not be easily accessible.
Government grants are well-thought-of as they have better interest rates but peer-to-peer lending is a lot easier and quicker; especially as the whole process is completed online.
This means the platforms can afford to offer a more attractive package with better rates for lenders and investors.