Why do Small Businesses in India Stumble to Get Loans?


The government of our country has been working to uplift small and medium enterprises for a long time. They recognize that this sector contributes to 30% of the GDP of the country and plays an irreplaceable part in providing employment to the citizens of the country.

The nano and micro enterprises of our country have been overlooked because of the lack of knowledge of their existence and informal nature. Most of the surveys that take place for this sector, end up skipping these small enterprises. A summary of how much these small businesses contribute is as below


Employment generated

GDP contribution

Exports contribution

120 million




Far Too Many Small Businesses In India Stumble On Loan Eligibility

The MSMEs also have micro and nano units and enterprises which form a part. Most of these enterprises are informal and do not have a stable annual turnover. 99% of these enterprises are micro-enterprises.

A survey done in 2015-16 stated that around 62 million enterprises are working, with approximately 20. Amongst them, the majority are single-worker units. These enterprises earn an income just enough to survive the business market. This sector thus has a promising revenue for the government.

Reasons for Denial of Loans to Small Businesses

  • Credit Score

A primary reason for denial of a loan to a small business is a poor credit score. A successful venture can have a bad credit score. The credit score benchmark rate is generally 30%, but it differs from lender to lender. Thus who should check the credit score with a credible and reputed agency for availing of a loan? It is possible to improve the score after taking specific steps.

  • Collateral

Investors or banks look for security or collateral while providing a loan to the business. They prefer to have tangible assets that can liquidate if the company fails to repay the loan. Many business owners are not willing to pledge personal support for a business loan.

  • Loan Amount

The reason why a lot of loans are not sanctioned for small businesses is the loan amount. The greater the loan amount, the higher the chances of approving the loan. The traditional business owners do not consider the costs of serving loans worthy, and thus they hesitate to apply for loans with banks or other lenders.

  • Life of the Business

Availability of a loan also promises a repayment towards the lender and creditworthiness. If small businesses are new, no prior records can be seen, and giving the loan is a lot riskier for the lender. This is why many small businesses miss out on opportunities to avail of loans.

  • Industry of Operation

A traditional lender will not always provide credit to industries that have a high risk attached to them. New lenders may do so at a very high rate, and thus, many micro and nano enterprises get affected due to the non-availability of loans.

  • Leverage

Even Though leverage is a cost-reducing financial tool, it may lessen the chances for an organization to obtain debt due to pre-existing debt obligations. Paying off the existing debts may help an organization get into debt more quickly.

  • Cash Flow

The cash flow is a significant indicator for any organization to repay debt. The cash flow shows that the debt can be repaid, and the organization is also flourishing since there is an increase in the cash flow. Cash flow acts as an ability to sustain debt for any organization. Therefore, any organization should maintain positive cash flows for easier debt avails.

  • Inappropriate Paperwork

For any organization to avail of a loan, paperwork is essential. Proper documentation is as necessary as the proper running of the business. Due to a lack of experience, many small companies fail to submit the needed paperwork, and thus, their loan applications get rejected. 

Some Loans Available to this Sector are-



  • Interest rates 9.65% onward
  • The processing fee is 2% of the loan amount
  • The loan amount depends on the scheme
  • The loan repayment tenure is 120 months



  • Interest rates 15.75% onwards
  • The processing fee is 0.99% of the loan amount
  • The loan amount is up to 50 lakhs
  • The loan repayment tenure is up to 48 months



  • The interest rate is 13% onwards
  • The processing fee depends upon the scheme
  • The loan amount is up to 2 crores
  • The repayment tenure depends upon the scheme

Popular NBFCs are-

Fullerton Business Loan


  • Interest rate 17% -21% per annum
  • The processing fee is 6.5% of the amount
  • The loan amount is 50 lakhs
  • The repayment depends upon the scheme

Lendingkart Business Loan


  • The interest rate is as per the lender’s discretion
  • The processing fee is 2% of the loan amount
  • The loan amount is Rs. 50,000 to Rs. 1 crore
  • The loan repayment tenure is up to 36 months

Mudra Loan Scheme

It is a loan scheme for small and medium business owners and has a lot of sub-schemes that the applicant can check before borrowing funds.


Starting a business is like pursuing your ambition; hence, a proper framework has to be in place for any organization to flourish. The documentation and other paperwork should always be up to the mark. The borrowed debt must be channelized to proper use and obtained when necessary. With the help of the above points, one can make sure that what can avail debt and the chances of getting leverage can also be increased

Small Businesses in India Stumble to Get Loans?

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