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Details About Documents Required and Procedure To Apply For A Bank Loan For Small Businesses

bank loan for small businesses

Small businesses are the pillars of supports for large businesses and global organisations and provide a major boost to the country’s economy too. Starting a small business is thus, how a positive step towards mass entrepreneurship and towards creating opportunities for others while also taking a step towards being an independent business owner that contributes towards the growth of the country.

Like for every type of business, irrespective of its size, the first requirement to start a business is to procure funding for the business. This is especially vital in the case of small businesses as they are just starting out and require readily available funds and capital for a number of reasons, ranging from-

  • For investing in assets for starting the business such as for machinery, equipment, premises, materials, etc.
  • For the day to day functioning of the business such as wages, electricity charges, transportation, miscellaneous expenses, etc.
  • For future projects or expansion plans for the business
  • For emergencies and unforeseen situations or to simply keep as a safety cushion

Small businesses need to prepare a business plan when they approach institutes for funding. The institutions that can provide funding include-

  • Banks
  • NBFCss or Non- Banking Financial Institution
  • Other Financial Institutions

Also Read: Types of Collaterals That Can Be Used to Avail a Secured Business Loan

The business plan must be comprehensive and cover all the details and future plans for the business such as the business idea, the execution details of the idea including the marketing strategies and proposed profits, the knowledge and training possessed for the specific business requirement, need for funding or loan for specific purposes, the plan chalked to repay the loan taken, and display decent credit score along with some kind of guarantee to assure the bank or financial institution that the business owner or partners are capable of repaying the loan.

Documents Required For Applying For Bank Loan

There are basically two types of loans that one can apply for

  • Term Loan – which is for the purchase of fixed assets for the business
  • Cash Credit- which fulfils the requirement for working capital for the business, especially for the day to day operating of the business

In order to procure any of the above loans, business owners need to submit certain business loan documents and also meet certain pre-requisites to be eligible for the loan.

The common documents needed while applying for a bank loan (since banks are the preferred choice given their comparatively lower interest rates), include copies of –

  • Bankable project report
  • KYC documents such as PAN card or Aadhaar card
  • Address proof, (for a owned property Index II can be submitted and for a rented property an electricity bill or the rent agreement can be submitted as address proof)
  • Quotations for the machinery, furniture, equipment, assets that need to be purchased
  • Applicant’s 2 passport size photographs
  • Income Tax Returns or ITR form 16A (in case of existing businesses)
  • Bank statement of the last 6 months
  • Shop Act Certificate or Gram Panchayat NOC (for certain businesses)
  • Licences or Compliance Certificates which are specific to the business
  • Work orders, if there are any

The criteria that are usually required and examined while applying for a bank loan for a small business include-

  • Credit score- the credit history of the applicant (business owner/partners, individual proprietor) is seen to see that they have a sound credit background
  • Age- the age of the applicant or entrepreneur applying for the loan must be between 18 to 60 years
  • Feasibility- the business feasibility is examined by the officials before sanctioning the loan, in which they will even check the requisite knowledge possessed by the entrepreneur for the particular business, along with any official training or skill development. Also, the profit and loss projections made must follow industry standards
  • Guarantors- Business loans often require guarantors as specified by the banks, usually 2 guarantors for a loan amount up to Rs 5 lakhs and for higher amounts, along with a guarantor some kind of collateral security is also asked for

Also Read: The Reality of Being Self-Employed

Procedure To Apply For Bank Loans

The detailed application process usually differs from one bank to another but the basic procedure includes-

  • Filing in of the loan application form from the bank
  • Specifying the type of loan applying from the bank
  • Submission of a detailed project report specifying the reason for the application of bank loan
  • Submission of the requisite bank documents as specified by the bank

Most banks usually examine the application and approve it within a few days time.

Availability of funds for a business is a necessary requirement for every small business and if the documents needed and steps involved is known, the process becomes even more easier.

Vikas Agarwal
the authorVikas Agarwal
Vikas Agarwal is an IIT-Varanasi graduate in Chemical Engineering. He is the Founder and CEO of - an investment advisory website. He is a Business Development Professional but a Value Investor at heart. He writes articles on Finaacle, which focus on simplifying the art of investing and the causes of human misjudgment when it comes to investing. He also shares his experiences as an investor and lessons from some of the greatest investors of all time.

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