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4 easy ways for SME's to get a small business loan

There are 42.50 million SMEs (Small and Medium Enterprises) in India today. They contribute to 30% of India’s GDP and employ more than 100 million people. Yet, access to finance remains a huge challenge for Indian businesses.
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In an American Express survey, 42% of Indian SMEs said that getting funds to grow their business remains a huge challenge. Luckily, this has been changing in the last few years. Although getting funding still remains a challenge for most Indian businesses, there are some new-age financing companies that are making things a little easier. In this article, we will discuss the top 3 ways to get a business loan and the pros and cons of each.

Business loans from banks

This is the most traditional type of loan that a business owner can get, and it makes the most sense in certain cases. At the same time, getting a business loan from your bank may only be possible under circumstances. Even then, it can be a very painstaking and time-consuming process.

Pros

Variety of loans

Since business loans have been around for a while, banks have a number of options to suit different needs of an SME. From working capital loans to long-term asset-backed loans, banks have a range of options.

CGTMSE

If, as an SME, you qualify for the Credit Guarantee scheme, you can get a line of credit for up to Rs. 1 crore without any collateral. This is a great option for those looking for funds to expand their business or meet working capital requirements. However, only entrepreneurs with proven technical and business acumen qualify for this scheme.

Affordable interest rate

Unlike informal money lenders, banks don’t charge exorbitant rates of interest. Interest rates for business loans are usually between 11% to 16%.

Cons

Nearly impossible to get a loan without collateral or a guarantor

Most banks don’t provide business loans without demanding significant collateral. They also need a guarantor for the loan in case things go wrong. If you don’t have valuable assets or a reliable guarantor, getting a business loan can become a Herculean task.

Not ideal for those starting a business

Banks generally don’t give business loans to entrepreneurs whose ideas are still on paper. If you don’t have a business that’s up-and-running already, you can forget about a business loan.

Time-consuming

Business loan applications usually require a lot of paperwork including documents relating to GST, company registration, books of account, and business model. Plus, it takes anywhere between 60 to 90 days for the money to hit your account.

Personal loans from banks

If you don’t qualify for a business loan at your bank, you can still get financing for your business by taking a personal loan. Of course, personal loans come with their own drawbacks and are not always suitable.

Pros

No questions asked

With a business loan, you need to submit many different documents. The loan officer will also try to assess the viability of your business model. Personal loans are extended for any purpose and it’s up to the borrower to decide how they want to use the money.

Great for lesser amounts

A personal loan is a great idea if you don’t need a huge loan. As long as the amount is small, a personal loan may be a more hassle-free approach.

Cons

Not an option if you’ve already taken personal loans

It’s quite possible that you’ve already taken out a personal loan or are servicing your credit card debt. In that case, you may not be granted another personal loan.

Not suitable for long-term loans with high amounts

If you’re looking for a loan to invest in a fixed asset or for long-term research and development, a personal loan is not an option. If your loan requirement exceeds a certain amount, a personal loan may not be feasible.

Unsecured loans from NBFCs

In the past few years, the number of NBFCs has increased rapidly. In general, NBFCs have more relaxed lending norms than banks and are more open to extending collateral-free loans.

Pros

Less documentation needed

Unlike banks, NBFCs don’t need multiple business-related documents. Many NBFCs extend business loans without so much as a balance sheet.

Collateral-free loans

Subject to certain conditions, NBFCs actually extend unsecured business loans. For instance, many NBFCs don’t need collateral for loans under Rs. 30 lakh. Similarly, some NBFCs extend unsecured loans to businesses with a turnover of more than Rs. 10 lakh.

Less processing time

Unlike banks that take 60-90 days to process a loan, NBFCs can process loans in as little as 3 days. NBFC loans are a great option when the need for funds is immediate.

Cons

Higher interest rates

NBFCs traditionally charge higher interest rates than banks. However, with the financial services industry becoming more competitive, the interest rates are no longer exorbitant.

Loan amount

Unsecured loans are usually given when the loan amount is small. If you need a bigger loan to make a long-term investment in your business, you may not get an unsecured loan from an NBFC.

P2P loans

Peer-to-peer lending has emerged as a viable alternative to traditional loans. P2P lending platforms like Lendbox connect borrowers to individual lenders. A potential borrower fills an online application on the platform. Borrowers get instant personal loans while investors earn regular monthly returns.

Pros

Hassle free borrowing process

The borrowing process is far more transparent and simplified. Loans are disbursed very quickly and borrowers can interact directly with the investors.

Technology-powered platforms

Many P2P lending platforms like Lendbox use the latest technologies for faster KYC, screening, and verification. This makes it much faster and easier to get loans.

Lower interest rates and no hidden charges

P2P platforms cut out the middleman completely. This allows borrowers to borrow at lower interest rates and investors to get better returns. Unlike banks and NBFCs, there are no heavy-duty processing fees or hidden charges.

Cons

You still need to go through the underwriting process

Even though the process is much simpler, you still need to go through the underwriting process. This includes credit checks and any other checks set by the platform. Of course, this process tends to be much quicker because most P2P platforms are technology enabled.

Conclusion

Access to funds has traditionally been a major pain point for SMEs. In the past few years, fintech companies have come up with innovative solutions like P2P lending which has made it easier to access finances. If you’re looking to start or expand your business and have been hesitant because of a resource constraint, this is the time to take the plunge.