Which loan is best for business in India in 2023
24 March, 2023
Penenza founder
Dmitrii Pangin
A business loan is a type of financing that provides funds to a business for various purposes, depending on their needs. It can be used for working capital, expansion, equipment purchases, inventory, or other demands that arise along the way. Business loans are usually repaid with interest over a specific time period, also known as the term.

Here is a Step-by-Step Process of Getting a Business Loan, which helps to understand the steps of the process in more detail:

  1. Determine Your Business Needs. Before you apply for a business loan, you need to determine how much funding you need and what it will be used for. This will help you determine the type of loan you need for your specific business case, and what lender to work with.
  2. Research Lenders. Such lenders offer business loans and compare their interest rates, loan terms, and eligibility requirements. It is best to look for lenders that specialize in the type of loan you need and have experience working with businesses in your particular industry.
  3. Gather Required Documents. Lenders will require documentation to assess your creditworthiness and financial stability. This may include financial statements, tax returns, bank statements, and a business plan. These aspects are essential to succeeding the business loan application process.
  4. Apply for the Loan. Once you have chosen a lender, you can apply for the loan. The lender will review your application and come up with a decision that is based on your background. At this stage they may also request additional information or documentation.
  5. Receive Funding. If you are approved for the loan, the lender will provide you with the funds. You will typically receive the funds in a lump sum for your business. In addition to the loan a requirement to repay the loan over a specific term with interest.
How do business loans work?
There are several benefits of business loans for SMBs, including:

  1. Flexibility. Business loans offer flexibility in terms of loan amount, repayment term, and interest rate.
  2. Quick access to funds. Business loans can provide quick access to funds, which is essential for SMBs that need capital to grow or sustain their business.
  3. Improved cash flow. Business loans can help improve cash flow by providing the capital necessary to cover expenses or invest in the business and its working processes.
  4. Building credit. By making timely payments on a business loan, SMBs can establish a positive credit history and improve their credit score.
  5. Potential tax benefits. Depending on the loan structure, SMBs may be eligible for tax deductions on the interest paid on the loan over the given time period.
Benefits of Business Loans

Buy Now Pay Later is a rapidly growing type of loan that serves as a close substitute for credit cards
Rohit Chopra СFPB Director
When applying for a business loan, there are several important terms and conditions to consider:

  1. Interest rate. The interest rate will impact the cost of the loan and affect your monthly payment amount. This decision should be undertaken with consideration to the company’s overall budget.
  2. Loan term. The loan term determines how long you have to repay the loan.
  3. Collateral. Some lenders may require collateral, such as equipment or inventory, to secure the loan.
  4. Fees. Some lenders may charge fees, such as origination fees or prepayment penalties.
  5. Eligibility requirements. Lenders may have specific eligibility requirements, such as minimum credit score or revenue, that businesses must meet in order to be approved for receiving a loan.
Important Terms and Conditions to Consider
Loans are a crucial tool for businesses to maintain and expand their operations, but it may be difficult to choose the right one given the wide range of options and possibilities available on the market. To assist businesses in making educated decisions regarding their financing options, this section will present a succinct review of each of the loan types available for businesses in India, highlighting its features, advantages, and eligibility requirements.

Term Loan

One of the most common forms of loans provided to businesses in India are term loans. Banks and other financial institutions offer these loans to assist firms in addressing their long-term financial needs, such as capital purchases, working capital requirements, and expansion plans. Compared to other loan kinds, the loan amount is often bigger, making it appropriate for big companies that need more money.

The fact that term loans have lower interest rates than other loan kinds is one of its benefits. This is due to the fact that they are secured loans, meaning that firms must put up collateral as security for the loan repayment. Lenders are able to provide cheaper interest rates since this lowers their risk. The interest paid on these loans may also be eligible for tax deductions for companies in the B2B sector.
Businesses need to be in excellent financial standing and have a high credit score to qualify for term loans. Financial statements, bank statements, and other supporting data are frequently requested from small and medium sized businesses by lenders in order to support loan applications.

Working Capital Loan

In India, company loans for working capital are a common source of funding. These loans are intended to assist businesses in managing their ongoing cash flow and operating costs. Working capital loans are often small, short-term loans that are taken out to pay for inventories, raw material purchases, or other operating costs.

Working capital loans' flexibility is one of its best qualities. This type of loans, as opposed to other types of finance, can be customised to the borrower's unique requirements. For instance, a company might need to take out a loan to buy merchandise to satisfy seasonal demand. In this situation, the loan may be set up to give cash during the busiest part of the year and then be repaid after that, adjusting to the given circumstances.

Working capital loans are usually easier to get than other forms of loans and are authorized swiftly. Moreover, working capital loans do not need collateral, therefore firms are not required to put up assets such as property or equipment as per the security measures.

Loan Against Property

Loans Against Property (LAP) are a common way for enterprises in India to borrow finance. These loans are secured by the borrower's property, which might be residential or commercial. This loan is provided to firms who want cash for expansion, working capital, or debt consolidation. In order for a business to qualify for an LAP, the borrower must be an Indian resident and own the property that will be used as collateral.

LAP loan amounts generally range between 50% and 70% of the property's value. LAP interest rates are frequently lower than unsecured loan interest rates, and the payback period is generally from 5 to 15 years.
One of the most notable advantages of LAP is that it has a lower interest rate than unsecured loans, making it a more appealing option for businesses seeking capital. It also allows consumers to repay the loan over a longer period of time, decreasing the monthly installment cost.

Equipment Financing

Equipment finance is a common financing option for Indian firms who need to buy equipment but lack the funds to do so. This sort of financing enables firms to buy critical equipment without sacrificing their operating capital, as well as to spread the cost of the equipment throughout its life span.

A solid credit score and a steady financial history are required for the borrower to be qualified for equipment financing. To secure the loan, the borrower must also offer collateral or a personal guarantee. Often, the equipment being funded serves as collateral itself.

The loan amount available through equipment financing is often up to 80% of the cost of the equipment, with payback periods ranging from 3 to 7 years. Because of the additional risk connected with the loan, interest rates on equipment financing are often higher than on regular loans.

One of the most significant benefits of equipment financing is that it allows firms to buy critical equipment without having to pay for it up front. This can assist organizations in retaining working cash and investing it in other areas of the business that are of importance towards overall development.

Equipment financing might be advantageous for organizations that require regular equipment upgrades. Instead of purchasing new equipment every few years, firms may finance it and improve it as needed. This can help organizations maintain a high level of production while remaining competitive among other companies in their industry.

Top 9 types of business loans in India

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Invoice Financing

Invoice finance is a common lending option for Indian businesses that want rapid access to capital. It is a sort of short-term financing in which firms obtain cash advances on outstanding invoices.
A solid credit score and a steady financial history are required for the borrower to be qualified for invoice financing. In addition, the borrower must have outstanding bills from respectable clients. The invoice serves as loan collateral.

The loan amount available through invoice financing is often up to 80% of the invoice value, with payback terms ranging from 30 to 90 days. Because of the lesser risk connected with the loan, interest rates on invoice financing are often lower than those on traditional types loans.

Invoice financing might be advantageous for firms that have seasonal cash flow variations or need to support operations while waiting for clients to pay their bills. Instead of relying on costly short-term loans or credit lines, businesses may use invoice finance to satisfy their cash flow needs.

Business Credit Card

Business Credit Cards provide a line of credit that may be used by businesses to purchase inventory, office supplies, and other business needs. They provide various benefits over typical bank loans, such as flexible repayment periods, bigger credit ceilings, and incentive programs.

Businesses must have a strong credit history and fulfill the card issuer's minimum revenue standards to be eligible for a business credit card. Owners of businesses must also give proof of ownership, such as a certificate of incorporation, and may be required to offer personal guarantees if they do not meet the credit requirements.

Business credit cards often come with a variety of perks, such as cash back, reward points, and discounts on company costs. To entice new consumers, several credit card companies provide sign-up incentives and low introductory Annual Percentage Rates (APRs).

Furthermore, credit cards frequently have expenditure monitoring facilities, making it simple for business owners to track their expenses and manage the accounting of their company.

Business Loan for Women

Business Loans for Women is a financing option in India geared towards female entrepreneurs in need of capital to expand their companies. The Indian government has made steps to boost women's entrepreneurship and financial inclusion by providing different programmes and incentives, such as lower interest rates and flexible repayment choices, to encourage women to start and operate their own enterprises.

To be eligible for a business loan for women in India, the borrower must be a woman of 18 years of age or older who is either a solo proprietor, a partner in a partnership firm, or a director in a private limited company. A decent credit score, a solid company strategy, and a track record of profitability and revenue growth are among the requirements for qualification.

Business Overdraft

A business overdraft is a flexible borrowing solution that may assist Indian firms in their managing cash flow and covering unforeseen costs. An overdraft essentially permits a firm to take more money than it presently has in its account. A firm in India must normally have a strong credit history, a stable income stream, and a healthy cash flow to be eligible for a business overdraft.

One of the benefits of a business overdraft is that it may give firms with instant access to capital, which is especially crucial in sectors with shifting demand. Another advantage is that companies only pay interest on the portion of the overdraft that they use, rather than the entire limit. Business overdrafts are especially beneficial to SMB distributors of various products and their clients, as they may assist bridge payment cycles and provide working cash for inventory purchases.

Cash Advance for Merchants

Cash advances for merchants is a financing option used to obtain a large sum of cash in exchange for a proportion of their future sales. Cash advances for merchants are especially beneficial to SMB distributors of various products and their consumers, as they may assist them in managing their cash flow and growing their business. In other words, you only pay back the loan as additional money arrives into your company’s budget.

The amount of the cash advance is often determined by the company's monthly income and sales estimates. Depending on the supplier, payback terms and interest rates may differ.
One of the benefits of merchant cash advances is that they may give fast access to funds without the requirement for collateral or a long approval procedure, which can occur when applying to other types of loans.

Cash advances for merchants may be a useful tool for Indian businesses wishing to grow their operations or engage in marketing efforts, for example. There are several cash advance providers for merchants in India, including traditional banks and innovative fintech startups.

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Getting a business loan in India can be a complicated process, but with the right preparation, it can become a successful endeavor for you and your business. Here are the most important specifics of the process of applying to get a business loan in India:

  1. Prepare Your Application. A thorough loan application that includes your business plan, financial statements, and any other documentation the lender may require must be prepared in order to apply for a business loan in India. Making sure all the requirements are met is crucial to a smooth application for a business loan.
  2. Submit Your Application. After you have prepared your loan application, you will need to submit it to the lender along with any required documentation. The lender will then review your application and determine whether or not to approve your loan for the specific need that you stated.
  3. Receive Your Loan. If your loan application is approved, you will receive the loan amount in a lump sum or in installments, depending on the loan terms. You will then need to make regular payments on the loan until it is fully paid off. This process usually occurs over a fixed time period, ranging from a few months to years.

It's important to note that getting a business loan in India can be a challenging process, especially for small and medium-sized businesses. To increase your chances of success, it's crucial to prepare a strong loan application and work with a reputable lender that understands your business industry and the needs that come along with it.

In addition to the steps outlined above, there are a few other aspects to consider when applying for a business loan in India. These include:

  1. Eligibility Criteria. Most lenders have specific eligibility criteria that businesses must meet in order to qualify for a loan. These may include factors such as minimum revenue, credit score, and business age.
  2. Loan Types. There are several types of business loans available in India, including term loans, working capital loans, and business line of credit. Each type of loan has its own advantages and disadvantages, as well as policies and conditions, so it's important to carefully consider which type of loan is the most suitable for your specific business and niche.
  3. Interest Rates and Fees. When applying for a business loan in India, it's important to pay close attention to the interest rates and fees associated with the loan. This will help you determine the total cost of the loan and ensure that you are able to make the required payments in the stated amount and around the given time frame provided by the lender.
How to get a business loan in India?
Small enterprises significantly contribute to the rapid growth of the Indian economy. Simultaneously, they frequently suffer financial limits that slow down their development and expansion. To solve these issues, the Indian government has developed many packages to aid small enterprises with financial support.

Below are some of the loan schemes available in India for small businesses:

  1. Pradhan Mantri Mudra Yojana (PMMY): PMMY is a flagship initiative of the Government of India that intends to provide collateral-free loans to micro and small firms. Based on the stage of business growth, these loans are divided into three categories: Shishu, Kishore, and Tarun, which cover different objectives of a business.
  2. Stand-Up India Scheme: The Government of India created the Stand-Up India Programme to promote entrepreneurship among women and SC/ST populations. This initiative provides collateral-free loans for the establishment of greenfield firms in the manufacturing, services, or trading sectors.
  3. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): CGTMSE is a credit guarantee plan that assists small business owners with advantageous loans. By offering a credit guarantee, this plan tries to encourage banks and financial institutions to lend to small firms without collateral.
  4. Mahila Udyam Nidhi Scheme: This is another initiative that was developed by the Government of India to give financial help to women entrepreneurs. Under this program women entrepreneurs can apply for loans to start new businesses or expand existing ones.
  5. National Small Industries Corporation (NSIC) Subsidy: NSIC offers small firms a variety of financial help, including raw material aid, marketing assistance, and financial support. The NSIC also provides a 15% subsidy on the acquisition of machinery for small firms.
  6. MSME Business Loans for Start-ups in 59 Minutes: Start-ups and current enterprises can apply for loans of up to INR 5 crores using a digital platform, on which the process takes 59 minutes. To be eligible for this plan, businesses must have a valid GST registration, PAN card, and six months of bank statements. The benefits of this scheme include a simple application procedure with low paperwork needs. Furthermore, the loan has a low interest rate, making it an appealing alternative for SMBs seeking financial help.
  7. The Credit Guarantee Scheme (CGS): This is a lending program developed by the Indian government to offer beneficial loans to micro, small, and medium-sized businesses (MSMEs). Businesses can borrow capital from banks and financial institutions without collateral or third-party guarantees. The CGS includes both term loans and working capital loans. By offering credit guarantee protection, the CGS also helps lenders manage risk and encourages them to lend to small enterprises. To be qualified for the CGS, the company must have a valid Udyog Aadhaar Memorandum (UAM) and follow all of the government's laws and regulations.
  8. The Credit Link Capital Subsidy Scheme for Technological Upgradation (CLCSS): Indian government designed a credit program that aims to assist small and medium-sized firms (SMEs) in upgrading their technology. The initiative offers a 15% capital subsidy to qualified companies for technological upgrades, which may be used to acquire or install new equipment and machinery. SMEs must be registered with the right authorities and have a valid credit history to be eligible for CLCSS.
Government loan schemes for small businesses
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After the U.S. and China, India's startup ecosystem is the third-largest in the world, with approximately 26,000+ startups nationwide, with at least 100 "unicorns" among them.

You may be interested in receiving startup loans if you operate a small or medium-sized business in India. These loans are designed for entrepreneurs who are just getting started and want financial support to get their firms up and running.

In order to qualify for this type of loan, you must have a good business strategy and a clear grasp of your financial needs to be eligible for a startup loan in India. As a startup founder, you will also have to show proof of your company's capacity to repay the loan. Financial predictions, revenue forecasts, and other supporting documentation may be included.

Obtaining a startup loan in India has various advantages. For one thing, it can offer you with the funds you need to acquire equipment, recruit personnel, and cover other beginning expenses. Furthermore, many startup loans include flexible payback terms and low interest rates, which makes it easier to manage your cash flow and expand your business over time.

Additionally, there are many startup events and contests in different Indian cities every year. These are one of the best ways to showcase the potential of your idea and compete with other businesses. Such competitions can help your company attract potential and well-known investors.
Startup loans
  1. Axis Bank: This is the third largest private bank in India that provides a variety of business loans to help firms achieve their financial aspirations. Axis Bank is famous for its loans that are free of collateral and come with overdraft, term loan facilities and cash credit.
  2. State Bank of India (SBI): The largest public sector bank in India, State Bank of India provides a comprehensive variety of business credit solutions to SMBs. They provide working capital loans, term loans, equipment finance, and other services.
  3. HDFC Bank: HDFC Bank is one of India's top private sector banks, providing a variety of business loans to satisfy the financial needs of enterprises. The application procedure for HDFC Bank's business loans is fairly simple, and the response time is rapid, making it a perfect alternative for business owners that need to obtain cash quickly.
  4. ICICI Bank: ICICI Bank is another well-known private sector bank in India that offers a variety of business loans to satisfy diverse business requirements. ICICI Bank specialises in loan packages for certain areas like healthcare, education, and hospitality.
  5. Punjab National Bank (PNB): Punjab National Bank provides business loans to MSMEs and corporates, which can be financed with a term loan or an overdraft facility. To get loans at lower interest rates, almost all PNB MSME loan products demand collateral or a margin. The repayment conditions are set individually, ranging from 1 to 12 years.
  6. Kotak Mahindra Bank: In order to be accepted for a loan program in this bank, a pre-assessment of the applying business is performed. Firms can verify their eligibility for loan services by completing a questionnaire or by reaching out to specialists and customer consultants. Loans in this bank may come with additional charges that need to be acknowledged by company owners.
Top commercial bank business loans in 2023