Finance

Guide to Small Business Loans for Young Entrepreneurs

Introduction:

Every business in this world was once initiated through the use of a small idea. In a nutshell, businesses are nothing but solutions to various problems. If you can’t cook food, there are restaurants. If you can’t drive, there are cabs. Likewise, there are a finite set of problems with finite solutions (known as a business). Young minds are the embryos of the new ideas, methodologies & innovations in existing processes. With the increase in the penetration of the digital world, many new small businesses are evolving. Many of them are led by young entrepreneurs.

Young Entrepreneurs

To boost this passion and to drive the energy on a rational path, complete guidance with small business loans is very much essential.

Why choose a loan option rather than other investment vehicles?

  • If you go for venture capital, it would dilute the equity holding of your business. This does not happen in the case of loans.
  • Equity investment by private entities would ask for a share in the profits of your business. However, bankers would ask only for interest on the loan.
  • Getting a small business loan through a bank is much easier and less complicated. Also, the business loan interest rates are competitive rather than personal loans.

What are the small business loan options?

A small business loan means where the needs for a loan are for a specific purpose. It also covers start-up loans. Following are a set of options available:

TypeExplanation
Equipment finance
  • Equipment can refer to a vehicle, basic machinery for office set up or customised equipment. Using equipment finance, you can upgrade the existing machinery or buy a new set of machinery.
  • However, the said asset needs to be given as collateral to the bankers. If you pay your loan on a timely basis, you can use the equipment. If you default, the lender has the right to repossess the equipment.
MSME business loan
  • This is an MSME loan to provide financial assistance for the growth of businesses in India. The amount of loan can be availed up to Rs. 1 crore.
  • The rate of interest depends on the nature of the business and other parameters.
  • This type of loan requires verification of business records, bank statements and ownership documents.
Mudra Loans
  • This scheme is introduced by the Micro-units Development and Refinance Agency, set up by the Government of India.
  • This loan is available in any bank in India. There are 3 categories of Mudra loan as per loan amount namely, Shishu loans (for loan amount up to Rs. 50,000), Kishor loans (for loan amount more than Rs. 50,000 but up to Rs. 500,000) and Tarun loans (for loan amount more than Rs. 500,000 but up to Rs. 10,00,000)
Stand up India
  • This loan is made available to ST/ST and women entrepreneurs. SIDBI provides these loans within the range of Rs. 10 lakhs to Rs. 1 crore.
  • The loan will cover about 75% of the project cost.
  • It is available at all banks across India.
Credit Guarantee Scheme
  • It is launched by the Government of India to allow funding without collaterals for businesses in the MSME sector.
  • The scheme can provide loans up to Rs. 200 lakhs.

What are the qualifications for availing such loans?

There are few factors to check your business loan eligibility as follows:

  • Age should be at least 21 years.
  • You should have complete clarity about your business idea. You should be able to convey your ideas to bankers. Your experience will help you to convey appropriately.
  • As a basic check, ensure to build your credit score. Generally, a personal credit score above 680 is considered reliable and creditworthy.
  • Your business experience should be 6 months or more.
  • Update your business plan every 6-months.
  • Have clarity about the purpose for which such a loan is required.

Where small business loans are utilized for?

  • To buy the main equipment or machinery for your business.
  • To expand the operations of the business.
  • Construction of factory building
  • Acquire additional inventory.

What care needs to be taken after a business loan is obtained?

  • Timely payment of EMI ensures that your CIBIL is clean. Since you are young, you will be building your credit history through such loans. This credit history will be useful in future.
  • Ensure to focus on your business goals and develop a rapport with your lenders and customers.
  • Stick to your cash flow forecast. Spend each penny wisely. Avoid unrequited expenses and allow only expenses which are necessary for the operations.
  • Take regular intervals from the routine business and assess its performance periodically.

Conclusion:

Doing a business is not a big deal, but managing the business is a big deal. This is where a loan is essential. You can check the business loan EMI calculator to suit your repaying capacity. Various government schemes encourage young entrepreneurs to take the risk and drive their business ideas.

Leah Leonard

Coffee expert. Troublemaker. Typical music guru. Friendly beer fanatic. Introvert. Web specialist. Uniquely-equipped for implementing bullwhips in Ocean City, NJ. Spent a year importing licorice in Hanford, CA. Have some experience licensing cigarettes for the government. Once had a dream of selling toy monkeys in Las Vegas, NV. Spent the 80's working on hula hoops in Minneapolis, MN. What gets me going now is working with action figures in the government sector.

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