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Tata Capital > Blog > Loan for Business > The Pros and Cons of Business Loans for Clothing Business

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The Pros and Cons of Business Loans for Clothing Business

The Pros and Cons of Business Loans for Clothing Business

Mark Twain said, “Clothes make a man”. People today put a lot of thought into their clothing and the message it conveys to the world. Thus, clothes not only reflect a person’s taste but also say a lot about their personality. This is probably why running clothing businesses can be tricky. What one person calls beautiful could seem weird to another. You have to take objective calls on designs and collections that will be judged subjectively by each of your customers. But that’s not all. You also have to take financial decisions that can significantly impact your business at multiple levels, with the most important decision being how to fund your business.

There are various ways to fund clothing businesses. You could get a small business loan, onboard investors, or sell equity: the options are endless. So how do you decide? Often the best thing to do in such situations is to break things down into simpler chunks. For example, coming up with a pros and cons list.

In this blog, we’ll look at the pros and cons of a small business loan to set up a clothing business.

Pros of a business loan

  1. Retention of ownership

When you apply for a business loan, the lender will ask you for an elaborate business plan. Only if they approve the plan will they sanction your loan. But once your loan is disbursed, the lender will not interfere in your business, as long as you pay your EMIs on time. You get complete authority over every decision, be it creative, strategic, administrative or financial.

Retention of ownership also means you are entitled to the entirety of your profit. No one can claim it. However, this is not the case when shareholders or investors enter the picture.

  1. Variety of options

There are many types of business loans. Based on your requirements, you can get a working capital loan, a machinery loan, or an SME loan. Further, you can choose if you want this loan to be a term loan, where you pay a fixed EMI for the loan tenure or a hybrid term loan, where the interest is calculated only for the amount used.

3. Flexibility in repayment

With a business loan, you can choose a tenure and EMI option that works best for you. Most financial institutions offer customized EMI programs that are flexible and better suited for clothing businesses where the income is not consistent every month.

  1. Availability of funds

A business loan can make large sums of money available to you very quickly. The best part is you can even get a small business loan without any collateral. Getting a loan is the easiest way for small businesses to raise a large amount of funding.

  1. Tax benefits

One of the biggest business loan benefits is tax exemption. You can claim tax deductions on the interest you pay on your business loan. This is a blessing for entrepreneurs struggling with business expenses and EMI payments.

Cons of a business loan

  1. Extensive application process

Financial institutions don’t just hand out loans to anyone. Since we are talking about large amounts of money, small business loans involve an elaborate and rigorous application process. You must provide extensive documentation to prove they can trust you with the funds. Some of the documents you may need are:

  • Trade license for business proof
  • Identity proof
  • Certified bank statements
  • Financial statements of your business

In addition, you will also have to give them a detailed business plan, outlining your long-term and short-term goals, explaining how you plan to use the loan amount and, more importantly, how you plan to pay it back. This plan has to be backed by accurate projections and numbers. Moreover, with some lenders, you may also have to give a short presentation.

  1. Higher rate of interest

Small business loans tend to have a higher interest rate. Even more so when the loan is unsecured. If you’re unsure of how much money you will need, you must choose the loan type carefully, as you may end up paying interest on the money you may not even use.

  1. Risk of default

Most small businesses cannot claim a steady income, and clothing businesses are no exception. But a liability like a loan requires consistent monthly payments. If your income for a particular month is not sufficient to meet your expenses, specifically your loan EMI, you could default on your loan. Without proper financial planning, the risk of default could be high and adversely affect your credit score.

Also,read:What Are the Types of Business Loans? 

How to Assess Your Clothing Store’s Loan Needs

Being prepared with data is a great way to tackle any problem. The same goes for deciding on a business loan. To know which loan type would suit you best and how much money you will need, you need to evaluate the needs of your business.

If your clothing business is already in operation, perform a gap analysis to see what you need to make it more successful. It could be a need for marketing, better displays, more staff, more collections, etc. You can also get feedback from your customers to know what needs work.

Once you know why you need the money and how much, it will be much simpler to decide on the kind of loan to opt for.

Types of Clothing Store Business Loans in India

There are different borrowing options available in the market for clothing businesses. Lenders usually offer loans as hybrid term loans or term loans. There are also many specific loans like machinery loans, SME loans, working capital loans, etc.

While different options have different business loan benefits, you can decide on the loan’s type, amount, and tenure based on your expected timelines for the expenses.

Eligibility Criteria for Clothing Store Business Loans in India

  • Business Vintage: Typically one to three years of operations are preferred, though new stores may qualify under select schemes for clothing store business loans.
  • Age Eligibility: Applicants are usually between 21 and 65 years, with loan maturity before 66.
  • Credit Score: A CIBIL score of 650 or above improves approval chances, while 700 plus strengthens terms.
  • Turnover and Profitability: Consistent annual revenue and at least one year of profits support eligibility for a loan for clothing business.
  • Business Structure and Documents: Proprietorships partnerships LLPs and private limited firms must submit valid KYC financial records and business proofs.
  • Documentation: Valid KYC business proofs and financial records support faster assessment and disbursal.

Also,read: Know your Business Loan Eligibility  

Documents & Steps to Apply for Clothing Store Loan

Once you’ve decided on a lender and the loan terms, start preparing your loan application. The application must tell the lender that you know what you’re doing. It must make the lender trust you.

For this, you will need a comprehensive business plan that is well-researched, thorough and backed by numbers. You will also need to submit many financial documents like your company’s balance sheets, profit and loss statements, tax returns, cash flow statements, and accounts receivable and payable documents.

These documents will give your lender a clear picture of your business’s financial health and your ability to manage your business. These and your credit score are important factors that can make or break your application.

Clothing Store Business Loan Alternatives: Other Funding Options

  • Overdraft Facility: A Lender approved overdraft supports short term working capital needs with interest charged only on utilised funds alongside a business loan for clothing store.
  • Trade Credit: Supplier credit helps stock inventory without immediate payment pressure.
  • Invoice Financing: Outstanding bills are converted into quick liquidity to maintain operations.
  • MSME Government Schemes: Subsidised interest and relaxed eligibility support small retailers.
  • Equity or Partner Funding: Capital infusion without repayment obligations suits long term expansion instead of a loan for clothing business.

Tips to Improve Your Approval for Clothing Store Business Loan

  • Financial Records: Maintain updated books bank statements and tax filings to show steady income and disciplined cash flow.
  • Credit Health: Pay dues on time reduce outstanding liabilities and correct errors to lift scores for clothing store business loans.
  • Business Stability: Demonstrate consistent sales operating vintage and repeat customers to reassure long term repayment capacity.
  • Loan Purpose: Present a clear utilisation plan inventory marketing or refurbishment to justify a business loan for a clothing store.
  • Documentation Readiness: Keep KYC GST and registrations organised to enable faster assessment and smoother disbursal.

Common Mistakes to Avoid When Applying for Clothing Store Loans

  • Unclear Funding Purpose: Applying without a defined usage plan weakens justification for a loan for clothing business.
  • Poor Credit Awareness: Ignoring credit scores or existing dues can lead to rejection or unfavourable terms.
  • Overestimating Eligibility: Requesting higher amounts than cash flows support raises repayment concerns for a business loan for clothing stores.
  • Ignoring Alternatives: Overlooking suitable funding options may result in unnecessary cost or rigid repayment pressure.
  • Incomplete Documentation: Missing KYC financials or registrations delays assessment and approval.
  • Multiple Applications: Applying to several Lenders at once increases credit enquiries and may negatively impact approval chances.

Start your business seamlessly with Tata Capital

Getting a business loan for your clothing business is no simple task. It involves carefully examining various elements and choosing an option that works best for you.

At Tata Capital, we offer different business loans like MSME/SME loans, machinery loans, loans for women, and more. You can even choose if you want a hybrid term loan or a term loan. With Tata Capital, you can enjoy competitive rates, minimal documentation, and flexible EMI programs.

So what are you waiting for? Call us or visit our website today to learn more about our business loan options!

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FAQs

How much business loan can I get for a clothing store in India?

The amount depends on turnover, profitability, and credit profile, as Lenders assess cash flows to decide limits under a business loan for clothing stores.

What documents are required for a loan for clothing business?

Lenders generally require KYC, GST registration, bank statements, ITR, and financials to assess stability and repayment capacity for a loan for clothing business.

Are startup clothing stores eligible for business loans in India?

Yes, startups may qualify under select schemes, as Lenders consider promoter profile, business plans, and projected cash flows for clothing store business loans.

What are the interest rates for clothing store business loans in India?

Interest rates depend on credit score, loan tenure, and risk, with lenders offering 10.5%–30% per annum for stable businesses.

Can I get an unsecured business loan for my clothing business?

Many lenders offer unsecured loans, approving based on credit, turnover, and repayment capacity, without collateral.

What is the best type of loan for a fashion or clothing retail store?

Working capital loans, overdrafts, or term loans suit different needs, depending on inventory cycles, expansion plans, and cash flow stability.

What alternatives can I consider apart from a business loan for clothing business?

Retailers may explore overdrafts, trade credit, invoice financing, or government schemes to manage liquidity without long term repayment commitments.

What are common mistakes to avoid while applying for a clothing store loan?

Avoid poor documentation, unrealistic loan amounts, multiple applications, and unclear usage plans, as these weaken credibility during Lender assessment.

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