All Things Legal / Business Financing / Women Entrepreneurship

How to get a loan for your business

. 7 min read . Written by Team Kool Kanya
How to get a loan for your business

There is no greater satisfaction than turning your dreams into a reality – whether it’s a job you covet or a business you want to start. But as we all know, the reality is not an easy path to walk on. Especially if you are a woman entrepreneur, in India or anywhere else in the world.

Any business needs an ecosystem to flourish. Getting a business idea and registering your business feel like a cakewalk if you have to go around scouring funding for your startup or your small scale or large scale business.

But the Kool Kanya guide on ‘How To Get A Loan For Your Business’ will help you navigate this path with ease. In this guide, you can understand the types of loans that are available for you and advice on which one is the best for your business.

Unsecured loans for businesses

An unsecured business loan is a funding solution which requires no personal or business asset as collateral. Businessmen prefer to take unsecured business finance because they have short turnaround time and reduces your dependency on friends, relatives or money lenders for borrowing money.

Unsecured loan can often prove to be the best option due to the quickness and flexibility it offers. Let’s look at the pros and cons of unsecured loans:

Does not require personal or business asset as collateral.

The loan amount is unconstrained depending on your credit score and cash flow.

Fewer restrictions resulting in better utilization of funds.

Unsecured loans have a much faster turnaround time. 

Helps you build a credit history if you manage to successfully payback in time. 

No personal collateral, hence no possibility of seizure of property.
Significantly higher rate of interest to offset the high amount of risk.

Small amounts are disbursed in absence of a collateral.

Tighter repayment schedule to minimize the risk exposure.

Although unsecured, you can still be dragged to court if you fail to repay your dues. 

Rigid requirements and strict eligibility needs to be fulfilled.

Credit scores and creditworthiness are crucial as collateral is not involved.

Unsecured loans can be the best or the worst choice for you depending on the variables. Think about these advantages and disadvantages of the unsecured business loans before opting for one.

Secured loans for businesses

Secured loans for businesses are a great way to acquire funds that can be repaid to the lender later. They are the loans that are taken against some type of personal guarantee or any valuable asset as collateral. Here are some examples:

Line of credit

A line of credit is more like a credit card where the card applies for the business rather than the individual’s personal credit.

  • No payment of interest on the borrowed amount for the first 9 to 15 months
  • Makes it easier for the business to tackle the preliminary expenses of starting the business.
  • The interest after the period will rise to anywhere between 7.9% and 19.9%, but the customer will only have to pay interest on the amount used.

Equipment financing

In this type of loan, the equipment is pledged as collateral, thus enabling the lender to charge a relatively low rate of interest with a slightly higher risk.

  • Applicants for this loan are expected to have a high credit score.
  • The borrower should repay the amount used to purchase the equipment as they earn revenue from their business.
  • The borrower can claim tax benefit for the depreciation of the equipment.

The documents required to avail equipment financing include:

  • a vendor quote
  • a detailed credit report
  • a statement showing the manner in which the customer intends to utilise the equipment.

Term loan

These are standard loans where you apply for a credit for a specific purpose and get a lump sum amount. Such credit will appear in your books of accounts as debt and you will need to show why you want the loan, your financial projections and your repayment capability.

  • These are long-term in nature and often utilised for capital expenditure.
  • The tenure is fixed, the amount of loan available is generally higher and depending on the credit profile of the business, the rate of interest can be lower.
  • Lenders prefer term loans to be backed by collateral, but in some cases, it can be unsecured in nature.
  • Terms loan can range between 5 to 20 years and can have fixed or variable interest rates.

Invoice financing

Invoice discounting and financing is a powerful tool to raise capital. This can provide a great way for small businesses to find working capital. There is often a time lag between when a business raises an invoice and when it finally gets paid. In such a situation, you can approach a bank or a financial institution to provide you a loan against the invoice.

  • About 80% of the invoice amount is given as a loan and the remaining 15% becomes due when the invoice is paid in full by the customer.
  • The lender will deduct a processing fee and interest, which is generally very low, from this amount.

To understand, whether your business could use Secured loans, look at the pros and cons to make the best decision for yourself.

Business loans come with easy and flexible repayment tenures.

Minimal documentation required to get the loan. Funds are swiftly disbursed to your account.

Well structured framework for processing funding request and evaluation.

Personalized service makes banks convenient and accessible.

Multiple loan options are available to choose from.

No profit-sharing in exchange of the loan and lower rates of interest.

Small businesses taking loans from banks enjoy some relief due to tax exemption.
Banks require you to submit collateral to get your loan against it.

Lengthy application process as credentials must be verified before sanctioning a loan.

The prospect of getting into the details is cumbersome and unnecessary.

Banks prefer running businesses as its profitability and credit history can be measured. 

Businesses should fulfil a long list of conditions that the bank imposes.

Risk of losing the collateral to the bank is high if your business fails to take off.

Banks usually do not agree to grant the whole amount requested for a loan.

Business loan eligibility

Banks use multiple factors to calculate the loan amount eligibility of their borrowers. The generic ones have been listed below:

Eligible age: Banks consider borrowers with age of 21 years to 65 years.

Citizenship: The applicant must be a citizen of India.

Business plan: You should have a business plan.

Loan amount: Loan amount of Rs. 50,000 to Rs. 100 Cr can be availed on the business loan. Higher the loan amount, the higher the chances to get a low-interest rate.

Loan tenure: Business loans are unsecured loans and are given for a shorter period. Generally, these loans are given for a tenure of 1 year to 5 years.

Income tax returns: A self-employed can get a business loan, only when it has filed regular ITRs for the past few years. Banks evaluate your monthly income and repayment capacity based on details submitted in the ITRs.

Turnover: Most banks and NBFCs ask for a minimum annual turnover of Rs. 1 Cr to be eligible for business loans without collateral. There are a few NBFCs and banks which lend to businesses or self-employed with a turnover of less than Rs. 10 lakh as well.

Revenue stability: Banks and NBFCs a check bank statements of minimum 6 months of your operational banking accounts to approve your loan to evaluate your banking stability and repayment capacity. Banks will also consider your outbound and inbound cheque bounce information to take a view on your credit track record.

Business vintage and growth: Business vintage and growth is an important factor considered by banks and NBFCs to take a decision to give you the loan as it gives the bank or NBFC an assurance that your business is authentic, stable and can generate profits to repay their loans. Your business or enterprise should be profitable in the last 3 years.

Applying for a business loan

Applying for business loans is simple, quick, and hassle-free. Many financial institutions and banks have enabled an online application for applicants to take advantage of. All they need to do is visit the official website of the lenders, fill-up the form provided, and upload a few documents. Then there is an option of visiting the nearest branch of the lender and submitting the application form and documents in the physical form. Once the details and the verification are complete, the applicant will receive the loan amount directly into their bank accounts.

Documents required to avail a loan

Photographs: 2 copies of passport-size photograph
Proof of identity: PAN Card, Passport, Aadhaar Card, Voter’s ID, Driving License
Address proof: Passport, Driving License, Aadhaar Card, Postpaid Phone Bill, Voter ID
Age proof: Passport, PAN Card
Bank statements: Account statement from last six months
Proof of income: Income Tax Returns, Salary Slips
Signature proof: Bank verified signature, PAN Card, Passport
IFSC code proof: Cancelled or scanned cheque, copy of passbook’s front page.

Business loan interest rates

The beginning

We understand that navigating the journey of setting up your business alone, is a difficult task. But with myriad options available for loans, you can be rest assured that your business will not only traverse the rocky roads but will also get the wings it deserves, to fly. You can also check our resource on funding available to women entrepreneurs through government and private lenders. Now it’s your turn to take the step towards translating your dreams into reality.