A small business may fail or struggles to continue for a long time without adequate funding. Small businesses grow only if they’re funded as and when required. Every business, irrespective of size, needs funding from outside at one point or another. While big corporates can plenty of options to raise funds from the market, a small business may not receive funding from the market easily. However, small businesses can get loans from banks and NBFCs, such as HDFC business loans.
Usually, small enterprises don’t find investors in the market to lack of exposure and experience. But small businesses can get a business loan from multiple lenders including banks and NBFCs (Non-Banking Financial Companies). Yes, you can get urgent loans for several financial needs of your business. Lenders like traditional banks, NBFCs and instant loan providers like Indifi, ZipLoan offer hassle-free business loans for small business owners. This type of unsecured business loan is offered for short repayment tenure.
How to get a business loan?
To get business loans, borrowers will need to meet eligibility criteria set by lenders. While the eligibility may criteria may differ from one lender to another, here are the common eligibility criteria for a business loan in India.
Cash flow and income
Cash flow and income of the business play an important role to get a business loan. Banks consider the turnover of a business based on the latest ITRs (Income Tax Return) filed by the borrower. The business should be in profit and have a regular cash flow. It assures the lender that the loan will be repaid without default. Lenders look into the income generated from the business to conclude how profitable your business is. However, some lenders offer instant loans to relatively new businesses without ITR.
Business tenure
Some businesses struggle to continue in their nascent phase. For this reason, mainstream lenders offer loans only to 2 – 3 years old businesses with somewhat stability. Today, instant loan providers also offer a business loan to relatively new business as well. For example, Indifi and ZipLoan provide loans to entrepreneurs. However, whether the business is new or old, the business should be running successfully for a reasonable time.
Credit score
Usually, small business loans are an unsecured loan and hence, a credit score is a very important factor that lenders consider while assessing a business loan application. Without a good credit score, it is difficult to get a business loan at low interest rate. Higher interest rates may be a risky choice for a small business. On the other hand, borrowers with a good credit score can enjoy attractive interest rates. Hence, a good credit score is important to get a business loan. A CIBIL score ranges from 300 to 900 and typically 750+ is considered suitable to get a business loan at favourable terms in India. Eligible borrower with a good credit score can also get higher loan amount.
Liabilities/ obligations
Existing liabilities of the borrowers are also looked at for a business loan. Lenders evaluate borrower’s FOIR (fixed obligation to income ratio), popularly known as a debt-to-income ratio, to determine eligibility of the borrower. The percentage of your debt payments is compared against the net income of the borrower per month. The debt-to-income ratio should be below 50%.
Other than the debt to income ratio, lenders also check the balance sheet of the business to evaluate the financial standing of the business. The balance sheet is a basic document that includes the financials of the business such as assets, liabilities, and equity. Generally, total assets need to be equal to the sum of liabilities and equity accounts of the business.
Credit utilization ratio
Banks also examines the credit utilization ratio of a borrower for a business loan. Lenders check the credit-hungry borrowers through credit utilization ratio. The credit utilization ratio is the used amount from offered credit on your credit card. The credit utilization ratio below 30% is considered ideal to get a business loan from mainstream lenders. New-age lender may agree to offer business loans even above 30% credit utilization ratio but the loan amount will be smaller and interest rates will be higher.
Collateral
There are two types of business loans – secured business loans and unsecured business loans. Unsecured business loans are collateral-free and offered to individuals who meet the eligibility criteria without failure. Borrowers have choice to get a secured business loan by pledging assets, inventory, residential or commercial property documents, etc. Generally, rates of interest applicable on secured business loans are relatively low when compared with unsecured business loans.
Small businesses may not have sufficient resources to get a secured business loan, hence they should try to get an unsecured business loan.
What is the business loan interest rate?
Interest rates and charges may vary from lender to lender. Here is a table for business loan interest rate 2021:
| Lender | Interest rate (p.a.) | Loan amount |
| HDFC Bank | Starting from 15% | Up to Rs.75 lakh |
| IDFC Bank | 19% onwards | Up to Rs.75 lakh |
| IIFL Finance | 18% onwards | Up to Rs.50 lakh |
| Axis Bank | 17% onwards | Up to Rs.50 lakh |
| ICICI Bank | 16% onwards | Up to Rs.40 lakh |
| Kotak Mahindra Bank | 16% onwards | Up to Rs.75 lakh |
| RBL Bank | 19% onwards | Up to Rs.20 lakh |
| Tata Capital | 18% onwards | Up to Rs.30 lakh |
| ZipLoan | 18% onwards | Up to Rs. 5 lakh |
| Bajaj Finserv | 19% onwards | Up to Rs. 20 lakh |
| Fullerton India | 17% onwards | Up to Rs. 50 lakh |
| Indifi Finance | 18% onwards | Up to Rs. 50 lakh |
| RBL Bank | 19% onwards | Up to Rs. 20 lakh |
Conclusion
As compared to past, today small businesses can also accumulate funds for expansion. To promote small businesses and startups, the government of India has also introduced multiple schemes for small businesses and startups in India. If you are not able to get simple business loans, you can try on these government-backed schemes to grow your business.
However, the first time borrowers should be careful to look at a combination of factors considered for a business loan. It will help them get the loan without any hassle. Check eligibility criteria online and compare rates offered by multiple lenders. Make sure your credit score is up to the requirement, business is profitable, cash flow is good and credit utilization ratio stands up to criteria.