Business Loans in India: A Comprehensive Guide
Access to timely and affordable finance is the lifeblood of any business, especially for Micro, Small, and Medium Enterprises (MSMEs) that form the backbone of the Indian economy. With over 6 crore MSMEs contributing approximately 30% to India’s GDP and providing employment to 11 crore people, the Government of India and the Reserve Bank of India have created a robust ecosystem of lending schemes and credit guarantee programmes to ensure that businesses can access the funds they need to grow.
This guide covers all the major types of business loans available in India—from Mudra loans for micro enterprises to CGTMSE-backed collateral-free loans, working capital facilities, and term loans from banks and NBFCs. Whether you are a first-time entrepreneur or an established business owner looking to expand, understanding the landscape of business finance will help you choose the right funding option.
The key to successful business borrowing lies in choosing the right loan product for your specific need, preparing thorough documentation, and maintaining a strong credit profile. This guide walks you through each step.
Types of Business Loans
Term Loans
A lump-sum amount borrowed for a specific purpose (machinery, equipment, expansion) and repaid in fixed EMIs over a defined tenure (3–10 years). Secured against assets financed or additional collateral.
Best for: Capital expenditure, machinery purchase, business expansion, premises acquisition.
Working Capital Loans
Short-term revolving credit for day-to-day operations—purchasing raw materials, paying wages, managing receivables. Includes Cash Credit (CC) and Overdraft (OD) facilities, renewed annually.
Best for: Managing cash flow gaps, seasonal inventory buildup, bridging receivable delays.
Mudra Loans (PMMY)
Pradhan Mantri Mudra Yojana offers collateral-free loans up to ₹10 lakh in three categories: Shishu (up to ₹50,000), Kishore (₹50,001–₹5 lakh), Tarun (₹5,00,001–₹10 lakh).
Best for: Micro enterprises, startups, small retailers, artisans, first-time entrepreneurs.
CGTMSE-backed Loans
The Credit Guarantee Fund Trust for Micro and Small Enterprises provides government-backed guarantee coverage (75%–85%) for collateral-free loans up to ₹5 crore to MSMEs through banks and NBFCs.
Best for: Small and medium enterprises lacking collateral but with viable business plans.
Mudra Loans—Detailed Breakdown
| Category | Loan Amount | Interest Rate | Tenure |
|---|---|---|---|
| Shishu | Up to ₹50,000 | ~1% per month (reducing) | Up to 5 years |
| Kishore | ₹50,001–₹5 lakh | 8%–12% p.a. | Up to 5 years |
| Tarun | ₹5,00,001–₹10 lakh | 8%–12% p.a. | Up to 7 years |
Mudra loans require no collateral or third-party guarantee. Apply through any bank, MFI, or NBFC. The Mudra Card (similar to a credit card) is available for Shishu borrowers for managing working capital requirements.
Eligibility & Documents Required
Eligibility Criteria
- • Indian citizen/entity registered in India
- • Business vintage: 1–3+ years (varies by scheme)
- • CIBIL score: 700+ preferred (650+ minimum for some)
- • Positive net worth and profitability (for larger loans)
- • Valid Udyam Registration (for MSME scheme benefits)
- • GST registration (for turnover-based loans)
Documents Required
- • Business PAN, GST certificate, Udyam certificate
- • Identity & address proof of promoters
- • Last 3 years’ audited financials & ITR
- • Last 12 months’ bank statements
- • Business plan / project report
- • Collateral documents (for secured loans)
- • Quotations for assets to be purchased
Interest Rates Comparison
| Loan Type | Rate Range | Collateral |
|---|---|---|
| Mudra Loans | 8%–12% p.a. | None |
| CGTMSE Loans | 9%–14% p.a. | None (up to ₹5 Cr) |
| Bank Term Loans | 8.5%–13% p.a. | Asset financed + additional |
| Working Capital (CC/OD) | 9%–14% p.a. | Stock/debtors/property |
| NBFC Business Loans | 12%–24% p.a. | Varies |
Women entrepreneurs typically receive a 0.25%–0.50% concession on interest rates across most bank lending schemes.
Tips for a Successful Loan Application
- ✓ Register on Udyam Portal before applying for any MSME scheme benefits
- ✓ Maintain a CIBIL score above 700—pay all existing EMIs on time
- ✓ File GST returns and Income Tax returns regularly
- ✓ Prepare a strong project report with financial projections
- ✓ Keep at least 12 months of clean banking transactions (no cheque bounces)
- ✓ Compare at least 3 lenders before finalizing
- ✓ Consider CGTMSE for collateral-free loans up to ₹5 crore
- ✓ Women entrepreneurs should explore Stand-Up India and Stree Shakti packages