Basics of Small Business Financing in India

When it comes to small business financing in India, a borrower needs to answer several critical questions to understand which type of lender and what kind of loan is best suited for them. Before asking for the money, you need to think about the amount of money you need, how quickly you need the money, and how you can pay it back and what is the tenure of the loan.

Conventional bank loans for instance, have low interest rates; the approval time for such loans is quick as compared to other lending institutions. Banks and most lending institutions have their own set of internal rules when it comes to small business financing in India. For each customer there is a fixed lending limit. If you are requesting for short-term credit, then you should satisfy the lending criteria set by the bank. As a borrower, you must show the bank that you have a good cash flow; your performance should be positive and operations have been satisfactory to generate cash for all kinds of financial commitments. In other words, you must have a proper portion of your own capital in the business. It is difficult to get credits from a bank, if most of the assets are already pledged to various other lenders. The lending institutions have the policy of granting overdraft facilities on the basis of security you offer; however, as a borrower you must explain in full detail about your transactions. Institutions like to know where the money is going; they want to link the finance to specific transactions.

Credit rating helps to determine the credit worthiness of an individual or an organization. In other words, it evaluates the borrower’s potential for repayment of debt. Mostly, this evaluation is done by a third-party credit evaluator. A good CIBIL score can actually establish your worthiness before the lender. Most financial institutions look at various financial, non-financial parameters, future spending trends and past credit history before grating a loan to the borrower. Having a sound credit history helps borrowers in case of small business financing in India.

There are two other ways to fund a start-up business; if you have credit cards, then you have already have a built in line credit. Credit cards are normally expensive ways to finance the company; but most of them are normally used as fund sources for start-up businesses. You can also take the help of leasing companies to finance and buy stuff such as computers, vehicles, phone systems, and other office equipments. Leasing can actually lessen the amount of start-up expenses, which means you need not incur a huge amount of money for everything. In case you are already in business, some of your existing customers may be willing to pay in advance for different products.

Before you select your loan amount and the kind of loan you want, you should always weigh the pros and cons of finance; take one step at a time, so that you do not have any financial burden.