Small and medium businesses are considered the life-blood of the Indian economy. As of March 2024, around 40 million MSMEs were registered on the government’s Udayam Registration Portal. While MSMEs form a significant portion of the Indian economy, often gaining access to easy credit has acted as an impediment to their growth and expansion. Most lenders are hesitant to sanction hefty business loans to small businesses due to the risky nature of these enterprises. However, small business loans have helped tackle this issue quite efficiently. 

The credit opportunities for SMEs has widened in recent years with the Indian government, banks, and NBFCs now offering tailored collateral-free small business loans. In fact, over the last few years, small business loans have become the lifeline for small businesses in India.  

What are Small Business Loans

Small business loans are easy finance options available to SMEs to help them grow and expand. In simple words, small business loans refers to the financial assistance available to small-scale businesses to cover their operational costs and fund their expansion plans. The chief objective of small business loans is to provide SMEs and start-ups with easy access to credit. Small business loans can be used to meet various business requirements right from business expansion to meeting working capital needs and upgrading inventory. Typically, small business loans are unsecured loans enabling SMEs without pledgeable assets to secure financing on favourable terms. 

5 Reasons Why Small Business Loans are Becoming the Lifeline for Small Businesses in India

Acquiring a small business loan has become relatively simple in India. With multiple government-backed MSME schemes, bank loan options, and lucrative NBFC loans, small and micro businesses can now easily secure credit at affordable rates. Here’s a list of reasons why small business loans are gradually becoming the lifeline for SMEs in India:  

Fueling Growth at Nominal Costs

Whether you want to expand your small business or launch a new line of products and services, adequate funding is essential. Small business loans offer easy access to such funding to expand your business and meet its growth requirements. With small business loans easily available, you can purchase the required equipment or lease another property to speed up business growth and meet your targets. The affordability of small business loans makes them highly attractive for businesses in India. While interest rates vary based on factors like loan amount, credit profile of the borrower, and their repayment capacity, they are often on the lower side, ensuring cost-effective financing. This easy access to affordable credit allows SMEs to fund growth initiatives and scale efficiently without experiencing significant financial strain. As a result, small business loans serve as critical lifelines for SMEs in India. 

Flexibility of Fund Usage

Another chief benefit of small business loans is the flexibility they bring to the table. Most small business loans do not come with end-use restrictions. This means you can leverage the approved loan amount to meet various business requirements. Whether you wish to use the funds to expand your workplace, hire new staff members, purchase new machinery and equipment, or simply invest the sum in R&D efforts, small business loans come with the flexibility needed to meet varied end goals and growth needs. The ability to allocate the loan amount according to your business’s needs and priorities helps optimise operations and maintain your competitive edge in the market. 

Easy Access to Positive Working Capital

Having access to sufficient working capital is a mandatory requirement for any SME. Working capital is crucial for funding the day-to-day operations of the business and meeting everyday business needs. However, maintaining positive working capital may be challenging for SMEs for various reasons like unpredictable customer payments, high overheads, etc. In such cases, availing of a small business loan can help entrepreneurs maintain a healthy cash flow to cover everyday operational costs like rent payment, salaries, supplier payments, and inventory refill costs. With adequate working capital at their disposal, SMEs can avoid sudden cash crunches and focus better on seizing growth opportunities for long-term business expansion and growth. 

Convenient Repayment Options

The flexible nature of small business loans also extends to their repayment options. Generally, lenders understand the complexities of business operations and offer flexible repayment terms to SMEs. In fact, most banks and NBFCs allow borrowers to avail of customised repayment options that suit their cash flow needs. In other words, lenders allow borrowers to personalise repayment terms as per their capacity to avoid cash flow difficulties. Based on their cash flow and preferences, borrowers can choose from pocket-friendly EMI payments and bullet payment options to efficiently make timely repayments without financially straining their wallets.  

Credit Score Boost 

Lenders assess the borrower’s credit score to determine loan eligibility and terms. Maintaining a credit score of 700 and above always increases your chances of securing business loans on favourable terms. Timely repaying your small business loan EMIs helps boost credit score and enhance your credit history. This, in turn, improves your chances of securing future credit at low interest rates and better credit terms. Simply put, small business loans act as a lifeline for building a strong credit history, paving the way for future growth opportunities. 

Conclusion 

Apart from these 5 reasons, swift online applications, simplified eligibility, high loan amounts, and quick disbursals have made small business loans lifelines for SMEs in India. Additionally, SME loans are generally collateral-free loans. This means SMEs can secure the loan without pledging assets. They can also avail of tax benefits on the loan since any interest paid on the loan is considered a business expense and can be deducted from the total taxable income. All this makes small business loans the lifeline of small businesses in India. 

Frequently Asked Questions

What are the benefits of a small business loan?

Small business loans offer easy access to capital for growth and working capital requirements, flexible repayment options, and affordable interest rates. SMEs can leverage small business loans to grow their business and boost their credit scores for better loan terms in the future. 

What are the interest rates on small business loans?

Interest rates for small business loans vary depending on the lender’s policies as well as the loan amount and borrower’s credit profile and CIBIL score. That said, most lenders offer pocket-friendly rates ranging from 10% onwards. Making business borrowing even more pocket-friendly, Lendingkart offers business loans starting from only 1,25% onwards. 

Are small business loans unsecured?

Most small business loans are collateral-free loans, allowing SMEs without substantial assets to access the necessary credit and meet their business requirements. 

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