How Self-Employed Individuals Can Get a Business Loan

Approximately 95% of the total industrial outputs in India come from small and medium-sized enterprises (SMEs). This sector produces more than 6,000 products and employs almost 40% of the current workforce in the country – about 106 million.

SMEs contribute around 24% and 6% to the GDP of services and manufacturing sector respectively.

You and your business are also part of this sector, a key contributor to the Indian economy. Now, you might require a business loan for self-employed to:

  • Buy/upgrade plant or setup.
  • Purchase equipment.
  • Restock inventory.
  • Consolidate existing debt, etc.

NBFCs make it easier for self-employed individuals to avail business loans. You can avail such a loan within 24 hours provided you fulfil a few criteria.

Here’s how you can get a loan for your business:

  • Increase your business credit score

You need to have a business credit score of 750 or more to avail personal loan for self employed. The credit score is one of the most vital criteria which a lender will consider since these loans are unsecured or collateral-free.

It is vital to know how to maintain a good business credit score. A high credit score means you are creditworthy to avail the loan. It ensures that you will be able to repay it without defaulting.

  • Satisfy the eligibility criteria

A loan for a business person comes attached with the following eligibility criteria that you have to fulfil:

  • Age between 25 and 55 years.
  • A business vintage of at least 3 years.
  • Fulfil the documentation procedure

You have to provide the following documents to avail a business loan for self-employed:

  • KYC documents – Aadhaar, PAN, Voter ID, Passport, Driving License, etc.
  • Proof of business – Trade license, GST registration, Articles of Association, Memorandum of Association, Shops and Establishment Certificate, Partnership Deed, etc.
  • Bank account statement of the last month.
  • Financial documents – Balance sheet, P&L account statement, etc.
  • Income tax returns of the previous year.

Some lenders may require you to audit your financial documents of at least the previous month by a CA.

  • Lower your debt-to-income ratio

Lenders may check your debt-to-income ratio or fixed obligations to income ratio (FOIR) before they sanction a loan for a business person. They give more preference to those with a FOIR lower than 50%.

This means that your monthly fixed obligations or fixed expenses must not be more than 50% of your income. To do that, clear your existing loans and credit card debt if any.

Before you apply for a business loan for your business:

  • Decide the loan amount

NBFCs provide business loans up to Rs. 30 Lakh. Make sure to decide the purpose of the loan and an amount that best suit your requirements. Try to be as frugal as possible and utilise the funds judiciously.

  • Check for additional benefits

Various financial institutions offer a wide range of features and benefits with a loan for self-employed. Compare them across lenders before you choose a lender and apply for an advance from them.

  • Consider the loan tenor

The tenors for these loans generally range from 12 to 60 months. An extended tenor will make your EMIs low and vice versa. However, the total cost of loan, or principal and total interest, will also be high with a long tenor.

For example, with a business loan of Rs. 5 Lakh at 12% rate of interest, the total interest will be around Rs. 1.67 Lakh for a loan tenor of 5 years. On the other hand, the total interest payable will be about Rs. 97,000 if the loan tenor is 3 years.

  • Compare the interest rates and charges

Take a look at the interest rates and fees when comparing the features. These also differ with financial institutions.

  • Have a business plan

Some lenders might ask for a business plan. You have to know how to create a strong business plan and cover all aspects of your company with it.

Follow this guide to apply for a business loan. Go for a personal loan for self-employed individuals to address your personal expenses. Utilise the funds from your business loan to escalate your business to new heights.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.