What is a SBA Loan?
SBA loan is a term inherited from the US. In the US context, SBA loans are business loans partially guaranteed by the U.S. Small Business Administration and issued by participating lenders, usually banks. These loans have tight lending standards, but if you can qualify for an SBA loan, their flexible terms and low-interest rates can make them one of the best small-business loans.
Considering the Indian context, of late there has been a marked increase in Micro, Small, and Medium Enterprises (MSMEs) and start-ups in India. This boost has only been supported by the MSME Act, 2006 and the Start-up India Initiative. However, if you are the founder of a start-up, then you know how challenging it can be to arrange for funding during the early stages. Additionally, the MSME sector in India has limited access to formal credit facilities. Thus, the Government of India has created various avenues that can help MSMEs and start-ups meet their capital requirements.
What are the SBA Loan Eligibility Criteria?
The eligibility criteria for each scheme and loan are different; however, the general criteria are as follows:
Age: As an applicant, you should be above 21 years of age, with the maximum age being 65 years.
Citizenship: You must be a citizen of India to be eligible for availing an SBA loan.
Moreover, the MSME or start-up should have been formed as a sole proprietorship, partnership firm, company or Limited Liability Partnership (LLP). The MSME or start-up must have a good credit score
What are the SBA Loan Documents Required to Apply for Business Loan for Start-ups?
Applicants have to submit the following documents while applying for the Business Loan for MSMEs and start-ups: KYC documents like passport, Aadhaar card, driving license, PAN card, Voter ID and utility bills; the business plan as drafted by the applicant; business incorporation certificate; business address proof; and any other document as specified by the lender.
What are the Top Government SBA Loan Programmes for Start-ups and MSMEs?
The Government of India has launched various schemes and Business Loan for MSMEs. They are as follows:
Pradhan Mantri Mudra Yojana (PMMY)
PMMY provides loans of up to Rs.10 Lakh to non-farm and non-corporate small and micro-enterprises. Under PMMY, you can obtain loans from institutions like Microfinance Institutions (MFIs), Small Finance Banks, Commercial Banks and Non-Banking Financial Companies (NBFCs).
You can apply for Mudra Loans by approaching these lending institutions. These loans are collateral-free and come with a repayment tenure of 1–5 years. The loan amount offered depends on the development stage of your business.
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
CGTMSE is a loan scheme that offers collateral-free business loans for MSMEs and start-ups. It offers a credit facility of up to Rs. 200 lahks to MSMEs and start-ups. CGTMSE also provides a guarantee cover to lenders in case the borrower defaults. The guarantee cover offered can be up to 50%, 75%, 80% or 85% of the loan amount sanctioned by the lender.
The National Bank for Agriculture and Rural Development (NABARD) classified select regional rural banks and scheduled commercial banks are institutions that offer Business Loans for MSMEs and start-ups. The interest rates levied under the scheme are decided as per RBI guidelines.
Credit-Linked Capital Subsidy Scheme (CLCSS)
CLCSS grants a subsidy to new and existing MSMEs or start-ups for technological upgrades. Under this scheme, you can get a subsidy of 15% on institutional credit up to Rs. 1 crore for identified technology, sectors and sub-sectors. You can approach the 11 nodal agencies or associated banks to avail of the subsidy. The scheme aims to help start-ups create products of superior quality by focusing on areas related to the same.
Bank Loans
Various banks and financial institutions offer loans to MSMEs and start-ups. All you have to do is meet the eligibility criteria and submit the documents required. Once your application is approved, you can avail a high-value loan amount. You have to repay the loan over a fixed repayment tenure.
However, the interest rate, tenure and loan amount on offer differ from one bank to another. You can repay the loan amount with interest due via equated monthly instalments (EMIs). You can choose from a standard business term loan, working capital loan, or any loan specially designed for MSMEs or start-ups.
SBA Loan Benefits
The following are some of the benefits of an SBA loan:
Begin Your Business
If you're ready to launch your business but lack the necessary funds, a business loan can benefit you. In some situations, you may be accepted for a large sum of money, allowing you to open your gates without stressing about how you'll pay for the initial start-up costs.
Flexibility
Borrowers could use loans to support them in achieving their business objectives, business owners can apply for a variety of loans to meet their financial needs. A long-term loan has a longer duration for repayment, as opposed to a short-term loan, which has a short duration. Company owners can choose between a business, personal or mixed-use loan depending on how long it lasts. Although 1-year loans are most frequently used, they can be stretched for up to 5 years or more.
Business Expansion
Expenses related to manufacturing and expanding the products and services are typical justifications for getting a company loan. To expand the business, the product line must be expanded. This strategy is used by many businesses since it helps them to grow by diversifying the methods by which they advertise their goods and services.
Rate of Interest Individuals can Afford
Business loans with competitive interest rates are provided by banks and NBFCs. The rate of interest on loans is affected by the loan's term, the collateral and the borrower's creditworthiness.
In addition, NBFC-lending options are offered with no processing costs and no prepayment penalties. By utilising low loan rates and minimal processing fees, borrowers may reduce their borrowing costs.
Improve Your Credit Score
You can improve your company's credit by obtaining business loans. Additionally, enhancing corporate credit will therefore increase the company's cash flow, one of the intriguing advantages of small business loans is this.
Convenient Repayment
For business loans, there are a variety of flexible repayment options. Therefore, the loan will be readily and swiftly repaid by the company, and they will be able to develop a repayment strategy that is specific to their requirements, thanks to their business effectiveness. Even the recurring payments could change accordingly with profitability.
Strengthens Business Credit Score
You may later be accepted for a range of financing choices with a strong company credit rating. A small company loan might help you establish your business credit. If you are a start-up, you can raise your credit score as long as you pay all of your bills on time and accurately.
Increased Promotions and Funding
All businesses have the common goal of seeing their name go popular on social media. Once you have the cash, you will get more chances to advertise yourself, apply advertising techniques and run successful ads.
Liability-free
A business borrower generally is not required to have collateral or to have a certain income level to be approved for a loan. It will be quite helpful for a small firm that is just getting starters both to meet its immediate demands and ensure long-term growth.
Lower Rate of Interest
Business loan interest rates are relatively affordable due to increased competition among banks, allowing you to take out a loan without being concerned about hefty repayments. Naturally, the interest rates that banks charge will differ from one customer to the next depending on creditworthiness, term period and the need for the business loan. The interest rates range from 11.5% to 24 %.
Tax Saving
When you avail business loans, you’ll be eligible for certain tax exemptions which will bring down your tax liabilities substantially.
Equipment Purchase
A business loan will also help you purchase much-needed equipment that is needed to upgrade your business to take your business to new heights.
Conclusion
With the business loan, you may benefit from quick funding, minimum or no collateral, and low-interest rates in the market. With the help of this business loan, you will be able to overcome any financial obstacles and receive the necessary funding to realise your business idea as well as to offer security for your company's financing. This makes it easier for business owners to obtain the money they want and allows them to continue operating their businesses smoothly.
If you are looking for an MSME loan to make your business dream a reality, then
visit Tata Capital today as Tata Capital offers MSME loans or SME loans at competitive interest rates.
FAQs
Q1. What is the application process for an SBA loan?
To apply for an SBA loan, you must first identify the different loan types and ensure your business meets the SBA's eligibility criteria. Then, choose a lender to start the application process. Prepare the necessary documents and fill out the SBA loan application provided by your lender. Submit your completed application along with all the required documents to the lender.
The lender will review your application and documentation. They will assess your creditworthiness, business viability and repayment ability. If your application is approved, the lender will issue an approval letter detailing the terms of the loan. Once the terms are finalised, you'll need to sign the loan agreement. After signing the loan agreement, the funds will be disbursed to your business account.
18 September 2023
8 mins read
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