Short answer: Small business loans in India come from banks, NBFCs and small finance banks, as term loans, working capital limits, overdrafts or invoice financing. Many owners can borrow without collateral through government-backed routes such as PM Mudra Yojana (up to ₹20 lakh under Tarun Plus) and the CGTMSE guarantee. Approval depends on business vintage, turnover, bank statements, ITRs and your credit score, not on any guaranteed scheme.
Last updated: 13 October 2026.
This guide replaces our 2022 page, which mainly described our own process. It now covers the full market as it stands in October 2026, including the higher Mudra and CGTMSE limits introduced since then.
Who counts as a small business
For most schemes, “small business” means a micro or small enterprise under the MSME definition, which is based on investment in plant and machinery and on turnover. Registering on the government’s free Udyam portal gives you an Udyam Registration Certificate, which many banks ask for and which opens access to MSME schemes. Shopkeepers, traders, service providers, small manufacturers and professionals running their own practice can all qualify.
Main types of small business loans
| Loan type | What it is for | Typical tenure | Collateral |
|---|---|---|---|
| Term loan | Equipment, expansion, renovation | 1 to 7 years | Often none for smaller amounts; may need security for larger |
| Working capital loan or cash credit | Stock, raw material, day-to-day costs | 12 months, renewable | Stock and receivables, sometimes property |
| Overdraft | Flexible short-term needs; interest only on what you use | 12 months, renewable | FD, property or unsecured for strong profiles |
| Invoice or bill discounting | Cash against unpaid invoices from buyers | Up to the invoice due date | The invoice itself |
| Equipment or machinery loan | Buying specific machines | 2 to 5 years | The machine is hypothecated |
| Short-term business loan | Seasonal demand, bridging gaps | 3 to 18 months | Usually unsecured |
Our types of business loans guide covers each in detail, and short-term business loans explains when a shorter loan makes sense. For invoice finance and the TReDS platforms, see bill discounting and TReDS.
Government-backed routes
PM Mudra Yojana (PMMY)
Mudra loans are for non-corporate, non-farm micro and small enterprises. They are given by banks, regional rural banks, small finance banks, NBFCs and microfinance institutions. MUDRA itself is a refinancing institution and does not lend directly or use agents.
| Category | Loan amount |
|---|---|
| Shishu | Up to ₹50,000 |
| Kishore | Above ₹50,000 up to ₹5 lakh |
| Tarun | Above ₹5 lakh up to ₹10 lakh |
| Tarun Plus | Above ₹10 lakh up to ₹20 lakh, for borrowers who have taken and fully repaid an earlier Tarun loan |
Tarun Plus was added after the Union Budget 2024 raised the overall Mudra ceiling; banks such as Indian Bank describe it on their scheme pages. Interest rates are set by each lender.
CGTMSE credit guarantee
The Credit Guarantee Fund Trust for Micro and Small Enterprises guarantees collateral-free loans given by its member lending institutions. If the borrower defaults, the trust covers part of the lender’s loss, so lenders are more willing to lend without property. The CGTMSE guarantee ceiling has been raised from ₹5 crore to ₹10 crore, and fees were revised for larger guarantees. The guarantee fee is usually passed on to you, so ask about it.
Other schemes
PMEGP (subsidy for new units), Stand-Up India (for SC/ST and women entrepreneurs), and PM SVANidhi (for street vendors) also help small businesses. We cover them in our government loan schemes hub.
Eligibility: what lenders usually check
- Business vintage: Many lenders want at least one to three years of operation. New businesses should read loans for startups.
- Turnover and profit: Shown through ITRs, GST returns and bank statements.
- Banking behaviour: Regular credits, few cheque bounces, and an average balance that supports the EMI.
- Credit score: Your personal score and, for companies, the business’s credit report.
- Existing debt: Lenders check that total EMIs leave enough cash flow.
- KYC and registrations: PAN, Aadhaar, Udyam, GST and shop or trade licence as applicable.
The full list is in documents required for business loans. If you have been turned down before, why your bank rejected your business loan lists the common reasons.
What a small business loan costs
Look at the full cost: interest rate, processing fee, guarantee fee, insurance (if any), and prepayment terms. The Key Fact Statement must show all of these and the annual percentage rate (APR).
Worked example: Ramesh runs a hardware shop and needs ₹5 lakh to stock up before the festive season, repaid over 3 years.
| Rate (reducing) | Monthly EMI | Total interest |
|---|---|---|
| 12% | ₹16,607 | about ₹97,900 |
| 18% | ₹18,076 | about ₹1,50,700 |
The 6 percentage point difference costs Ramesh about ₹52,800 more over three years. If the offer is quoted as a “flat rate”, the true reducing rate is much higher. Use the flat vs reducing rate calculator before signing.
Ask about prepayment and foreclosure charges too. RBI rules have restricted such charges on certain floating-rate loans to individuals and micro and small enterprises, so check your loan agreement and KFS for what applies to you.
Should you use a personal loan for your business?
Some owners, especially sole proprietors with salaried income on the side, take a personal loan for business needs because it is quicker and needs fewer business documents. It can work for small, short needs, but there are trade-offs. Personal loans are usually priced off your individual profile, tenures are shorter, the amount is capped by your personal income, and you do not build a business credit record. Interest may also not be treated as a business expense unless the money is clearly used in the business.
If your business has two or more years of records, a proper business loan or Mudra loan is often cheaper and larger. If you are self-employed and file ITRs, see loans for the self-employed with ITR for how lenders assess you.
How to improve your chances
- Route all business income through one current account.
- File ITRs and GST returns on time every year.
- Keep your personal credit score healthy; pay cards and EMIs on time.
- Ask only for what the cash flow can support. An EMI under about a third of monthly surplus is a common comfort level.
- Get Udyam registration done; it is free.
- Compare at least three offers on APR, not just the headline rate.
Ready to compare? See business and personal loan offers from RBI-regulated banks and NBFCs.
Before signing, confirm the lender is regulated. Check bank or NBFC registration using our RBI-registered NBFC search. Never pay an upfront fee to an agent to “get” a Mudra loan. For a broader overview, visit the business loans hub.
Frequently asked questions
How much can I borrow under Mudra?
Up to ₹20 lakh. Shishu covers up to ₹50,000, Kishore up to ₹5 lakh, Tarun up to ₹10 lakh, and Tarun Plus up to ₹20 lakh for those who have repaid an earlier Tarun loan.
Do I need collateral for a small business loan?
Not always. Mudra loans and loans covered by CGTMSE are collateral-free for eligible borrowers. Larger or riskier loans may need security.
Can a new business get a loan?
It is harder. Mudra Shishu, PMEGP and Stand-Up India are designed for new units. Many private lenders want at least one to three years of operation.
Does MUDRA lend directly?
No. MUDRA refinances lenders. Apply at a bank, NBFC or MFI, and avoid anyone claiming to be a MUDRA agent.
What credit score do I need for a business loan?
There is no single cut-off. Lenders weigh your score along with cash flow, vintage and existing debt. A clean repayment record improves both approval chances and rates.
Sources
Disclosure: FundsTiger (Gatimaan Finance Advisors Pvt. Ltd.) is a loan marketplace and lending service provider for RBI-regulated lenders. Aparampaar Finance Pvt. Ltd. (Omozing), one of those lenders, is a related party of FundsTiger. This article is general information, not financial advice. Read your loan agreement and KFS before you decide.