Many young students opt to start their entrepreneurial journey, as soon as they complete their higher education. Just to help them kick-start their path to business, most individuals require large funds. To meet their urgent cash requirements, they need to depend on business loans offered by various financial institutions, such as banks, NBFCs, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Micro Finance Institutions (MFIs), etc.
Most of the students who want to start their own business do not have a steady source of income or a credit history. Therefore, they might face some challenges in availing business loans. To avail funds for their Startups, firstly they need to check credit scoreand find out their eligibility for availing credit at ease. If their credit score is low then they need to improve it further to make themselves financially secure.
Acquiring business loans for a new business is a tough task, as banks are a bit reluctant to offer funds to businesses that do not have a business plan or have not acquired sufficient clients or work orders. Still, young entrepreneurs can avail business loans by drafting business plans that highlight the venture as a profitable prospect to the lending institutions.
Read on to learn some important things that you need to consider before applying for a business loan.
Types of Business Loans for Students or Young Business Owners
Let us know about the different types of business loans that can be availed by young entrepreneurs:
Term Loan (Short-term & Long-term Loans): Short-term loans cover urgent expenses like working capital requirements, operational costs, etc. The maximum loan amount availed can be up to Rs. 20 lakh and repayment tenure is up to 12 months. Long-term loans can be availed for longer periods from 1 year to 5 years or even more depending upon business requirements. The loan amount can range anywhere from Rs. 20 lakh to Rs. 2 crore.
Secured Loans: Secured loans are backed by security or collateral and are usually offered at lower interest rates, as compared to unsecured loans. The loan amount offered can be high with longer repayment tenure.
Unsecured Loans: Unsecured loans do not require collateral or security and are usually offered depending on the applicant’s credit score and creditworthiness. Unsecured loans are generally short-term and come with lesser loan amounts.
Overdraft: Overdraft is a credit facility that is based on collateral, which is usually your bank deposit. Overdraft sanctioning is based on your credit score, duration of bank relationship, account balance, and cash flows. An overdraft can be availed to meet urgent cash requirements, as it is sanctioned instantly.
MUDRA Loans: You can avail Micro Units Development & Refinance Agency (MUDRA) loan under Pradhan Mantri Mudra Yojana (PMMY) for amounts up to Rs. 20 lakh offered by banks under the ‘Tarun’ loan scheme. Moreover, there is no minimum amount limit to be borrowed. Mudra loans are funds offered under Govt. scheme that can be availed even if you are ‘New-to-Credit’ (NTC) or do not have a credit history/score. The interest rates offered by leading banks under Mudra Yojana are comparatively lower, as compared to other lending institutions.
Business Loan Eligibility Criteria
Young students can avail business loans with or without security. Every financial institution has its own defined eligibility criteria to be cleared by the applicants to avail credit. However, the basic eligibility criteria that banks seek in their applicants are as follows:
Age: Min. 21 years at the time of loan application & Max. 65 years at the time of loan maturity
Business Plan: Well-drafted business plan with all the business details
Credit Score: 750 or above (Preferred by most of the lenders)
Nationality: Indian citizen and not have defaulted on any previous loan(s) with any financial institution
Takeaways:
As you plan to apply for a business loan, you should consider the cost of availing it, which includes interest rates, documentation charges, processing fees, foreclosure charges, pre-payment charges, cancellation fees, and other hidden charges. You should not sign any loan document without reading all the terms and conditions, as you may need to make some alterations in the future. Once your loan has been approved, make sure to repay the entire loan EMIs on time and avoid any type of default. Finally yet importantly, make sure that you build your credit score if you do not have a credit history and try to improve it if your credit score is low.
