Best Loan Options for Shopkeepers: Pros and Cons Explained

Running local shops and retail stores requires hard work, dedication, and financial support. Whether you need support for expanding your business, managing daily operations, or for buying or upgrading equipment, it is important to choose the right financial solution.

Table of Content

• Different Loan Options for Shopkeepers
• Conclusion

Loans are a practical solution and allow shopkeepers to take control of their finances without having to dip into their personal savings. There are several different types of loans available for shopkeepers that offer financial flexibility to overcome challenges as they come. Shopkeepers can opt for a gold loan, personal loan, SME loan, or a Mudra Loan. Each option comes with its own set of pros and cons, which shopkeepers must know to make the right borrowing decision. 

Different Loan Options for Shopkeepers

Here are the top borrowing options that retail business owners can consider:

Business Loans for SMEs

There are several types of business loans or SME loans for retail business owners, like the term loan, working capital loan, equipment financing, etc.

Pros

• Access to Immediate Funding: These loans are generally processed and disbursed within a quick time range, from a few hours to a couple of days. It can fund immediate capital requirements, allowing shopkeepers to act on growth opportunities swiftly.
• Flexible Repayment Options: An SME loan offers great repayment flexibility, which can be beneficial for shopkeepers who are just starting off and want to pay back at their own pace.
• Competitive Interest Rates: Though interest rates vary with different loan schemes and lenders, shopkeepers can avail of competitive interest rates on SME loans by maintaining a good credit score, improving their credit history, and making timely repayments.

Cons

• Strict Eligibility Requirements: Business loans generally have strict eligibility criteria and lenders often look for good credit scores, substantial business revenue, and a certain business vintage, which is a major downside for new shopkeepers.

Gold Loans

A gold loan is a secured loan that can be availed of by pledging gold commodities as collateral.

Pros

• Quick Access to Funds: Gold loans involve minimal processing times and have straightforward application processes, allowing you to access funds almost immediately.
• Higher LTV: Gold loans have a higher loan-to-value ratio as compared to unsecured loans, allowing borrowers to maximise the value of the gold they pledge.
• Lower Interest Rates: Because gold loans are secured against collateral, gold loan providers offer competitive interest rates as compared to unsecured loans.

Cons

• Gold Price Volatility: Gold is a highly market-volatile commodity, with constantly fluctuating prices. How much you can borrow under a gold loan will depend on the weight and purity of the pledged gold as well as the gold rate on that day. So, you may not always be able to get the best market value.
• Security Risk: Till the time the loan is paid back, lenders have complete ownership of the pledged gold. If the borrower fails to repay the loan, the lender has the right to auction the pledged gold to recover the debt.

Personal Loans

A personal loan is an unsecured loan that is approved based on the profile and financial status of the borrower.

Pros

• Simple Application Process: Unlike business loans, personal loans are easier to avail. They also involve more lenient eligibility criteria.
• Flexibility: There are no limitations on the end use of funds availed under personal loans, which can be used to meet a variety of needs.
• Unsecured Loans: Personal loans can be availed without collateral. This is especially beneficial for small shop owners, who may not have the required assets to put up for collateral.

Cons

• Higher Interest Rates: Personal loans typically come with higher interest rates as compared to business loans or gold loans.
• Shorter Tenure: Personal loans have shorter repayment tenures as compared to SME loans, resulting in higher EMIs, which may strain the cash flow.

Mudra Loans

A Mudra Loan is a government-backed funding scheme, formally known as the Pradhan Mantri Mudra Yojana (PMMY).

Pros

• Zero Collateral: Mudra loans are unsecured loans and do not require any collateral or guarantor.
• Flexibility: Mudra loans are available in three categories, Shishu, Kishore, and Tarun, to suit the varying needs of borrowers. You can avail of a loan ranging from Rs 50,000 to Rs 10 lakhs.
• Higher Loan Amount: Mudra loan caters to borrower’s financial needs through its three loan schemes - Shishu, Kishore and Tarun.
• No Limitations on End Use: There are no restrictions on the end use of funds availed under a Mudra loan, which allows shopkeepers to meet various financial needs.

Cons

• Loan Amount Limitation: While you can avail varying loan amounts under the Mudra loan scheme, the maximum loan amount of Rs 10 lakhs may not suffice for shopkeepers with a larger capital requirement.

Conclusion

To select the best loan option, shopkeepers must first understand their business needs. After that, you can explore the wide range of financing options offered by Muthoot Finance, named India’s No. 1 Most Trusted Financial Brand for eight years in a row (since 2016) by TRA’s Brand Trust Report.