If you own a small business and need financial assistance, you’re in the right place. Starting a business is an excellent decision, but many entrepreneurs struggle due to a lack of funds. If you’re facing financial constraints, securing a business loan can be a great solution. However, the main question is:
Which loan is best for small businesses?
Several banks, non-banking financial companies (NBFCs), and financial institutions offer a variety of business loans. Additionally, the Government of India has introduced multiple schemes to promote and support small businesses. These government-backed loan schemes come with lower interest rates, minimal processing fees, and, in some cases, subsidies or collateral-free financing.
In this detailed guide, I’ll introduce you to the best small business loans, including both private and government-backed options, eligibility criteria, and application processes.
How to Secure the Best Loan for Your Small Business?
Getting a business loan today is much easier than before, provided you have a well-structured business plan. Banks and financial institutions evaluate your loan application based on your business plan, which should include:
- Business Objectives: What is the nature of your business?
- Revenue Model: How will your business generate profits?
- Expenses and Budget Plan: How will you manage costs?
- Growth Strategy: How will you scale and expand your business?
Steps to Apply for a Small Business Loan
- Prepare a Business Plan
A clear and well-documented business plan increases your chances of loan approval. - Check Your Credit Score
A credit score of 700 or above improves your chances of securing a business loan at a lower interest rate. - Choose the Right Loan Type
Depending on your business needs, select the appropriate type of business loan. - Select the Lender
You can apply for a loan through:- Banks (Public and Private Sector)
- NBFCs (Non-Banking Financial Companies)
- Government Loan Schemes
- Submit the Necessary Documents
Required documents generally include:- Identity Proof (Aadhaar Card, PAN Card, Voter ID, etc.)
- Address Proof (Electricity Bill, Rent Agreement, etc.)
- Business Registration Documents
- Income Tax Returns (ITR) for the last 2-3 years
- Bank Statements (Last 6-12 months)
- Apply Online or Offline
Most banks and financial institutions allow you to apply for business loans online. You can also visit the nearest branch to apply in person. - Review Loan Terms and Conditions
Before accepting a loan, understand the:- Interest Rate
- Repayment Tenure
- Processing Fees
- Hidden Charges (if any)
Types of Small Business Loans
Small business loans come in different forms, catering to various business needs. Below are some of the most common types:
1. Short-Term Loan
- Purpose: For businesses that need immediate funds for short-term needs.
- Loan Tenure: 3 months to 2 years.
- Collateral: Not required in most cases.
- Interest Rate: 10% to 25% per annum (varies by lender).
2. Working Capital Loan
- Purpose: Helps businesses manage day-to-day operational costs.
- Loan Amount: Starts from ₹1 lakh.
- Usage: Employee salaries, inventory purchase, raw materials, and operational expenses.
- Collateral: Usually not required for small loan amounts.
3. Business Expansion Loan
- Purpose: For SMEs and MSMEs planning to expand operations.
- Loan Tenure: 1 to 5 years.
- Loan Amount: Up to ₹10 lakh (can be higher based on eligibility).
- Usage: Business growth, purchasing machinery, or launching a new product.
4. Startup Loan
- Purpose: To help new businesses with initial capital.
- Loan Amount: ₹1 lakh to ₹10 lakh.
- Usage: Business setup costs, purchasing equipment, hiring staff, etc.
- Collateral: May or may not be required, depending on the lender.
5. Business Loan for Women
- Purpose: Special loans for women entrepreneurs at lower interest rates.
- Interest Rate: Generally lower than regular business loans.
- Additional Benefits: Some schemes provide government subsidies and training support.
Eligibility Criteria for Small Business Loans
To qualify for a small business loan, you must meet the following eligibility criteria:
- Age Requirement: Minimum 21 years old.
- Credit Score: 700 or above is preferred for better loan terms.
- Business Experience: Your business must have been operational for at least 3 years.
- Annual Income: At least ₹1 lakh per year.
- Business Turnover: Should range from ₹90,000 to ₹250 crore, depending on the loan type.
- Legal Compliance: You must be an Indian citizen with no criminal record.
Note: Different banks and institutions may have additional eligibility requirements.
Best Government Loan Schemes for Small Businesses in 2025
If you’re looking for low-interest, government-backed loans, consider the following schemes:
1. Pradhan Mantri Mudra Yojana (PMMY)
- Loan Amount: Up to ₹10 lakh.
- Interest Rate: Varies based on the bank but is lower than market rates.
- Eligibility: Micro and small businesses.
- Categories:
- Shishu: Loans up to ₹50,000.
- Kishor: Loans from ₹50,000 to ₹5 lakh.
- Tarun: Loans from ₹5 lakh to ₹10 lakh.
2. Prime Minister’s Employment Generation Programme (PMEGP)
- Loan Amount: Up to ₹25 lakh for manufacturing businesses.
- Government Subsidy: 15% to 35% (depending on business type and location).
- Eligibility: Entrepreneurs starting new ventures.
3. Credit Guarantee Scheme (CGS)
- Purpose: Helps small businesses get collateral-free loans.
- Loan Amount: Up to ₹2 crore.
- Who Can Apply: Small business owners, startups, and MSMEs.
4. PM Vishwakarma Yojana
- Purpose: Financial support for traditional artisans and craftsmen.
- Loan Amount: Up to ₹3 lakh.
- Interest Rate: Subsidized rates lower than market rates.
5. Stand-Up India Scheme
- Purpose: Supports women entrepreneurs and SC/ST business owners.
- Loan Amount: ₹10 lakh to ₹1 crore.
- Usage: Manufacturing, trading, and service-based businesses.
Final Thoughts: Which Business Loan is Best for You?
If you’re looking for quick financing, NBFCs and private bank loans can be an option, but they come with higher interest rates. On the other hand, government-backed loans are a better choice if you want low interest rates, subsidies, and flexible repayment options.
Before choosing a loan, always consider:
- Loan amount required
- Interest rates and repayment terms
- Eligibility criteria
- Hidden charges or processing fees
By carefully evaluating your options, you can select the best small business loan that meets your financial needs and helps your business grow.