SME Loans, or simply, loans for Small and Medium Enterprises are avenues for SMEs to explore the various debt products tailored to their needs. Be it to finance their working capital or expand business operations, SME Loans offer an accessible solution to such enterprises.
What are SME Loans?
SME Loans are loans that specifically cater to Small and Medium Enterprises (SMEs). Such loans could either be of short-term or long-term. They are categorised differently from standard business loans because of certain modifications in the terms and conditions of the loans to make them suitable for SMEs.
SME Loans take into consideration the peculiarities of SMEs to deliver products that are relevant to their life cycle.
Such loans are required so as to empower the SME sector which provides employment to a huge chunk of the population.
What are the types of SME Loans?
There are various types of SME loans being offered by Banks and NBFCs to cater to the sector’s debt requirements. A few common types include-
Working Capital Loan
These are loans taken for the working capital requirements of an enterprise. The loan could be taken to purchase raw materials, pay the salaries of the staff, or any other sundry expenditure of an enterprise. A working capital loan could either be secured or unsecured.
Term Loan
These are loans with a defined tenure with regular repayment in installments. These could either be secured or unsecured. A term loan is often the most sought SME loan since it allows the enterprises to repay the loan over a long period of time.
Loan against property
A Loan against Property (LAP) is a term loan with a property as collateral. The property being used as collateral could either be Industrial, Commercial, or Residential. The type of property being offered as collateral as well as its market value determines the total loan amount that could be sanctioned.
Line of Credit/Overdraft Facility
These are loans that allow an enterprise to fulfill its immediate cash requirements. A borrowing limit is sanctioned by a lender that allows enterprises to borrow within that limit as and when required, and pay whenever they have the capacity to. These are specifically suitable for SMEs to address their cash flow requirements.
Read more: What is Overdraft facility? Meaning, Types and How it Works
Equipment Financing
These are loans taken to buy or upgrade equipment/machinery. In such loans, the equipment bought or upgraded serves as the collateral itself.
How to get an SME Loan?
To get an SME loan, you must first decide the type of loan you’d like to opt for depending upon your requirements. Once that is done, the process to get an SME loan is as such-
- First, the entity wanting to borrow the money approaches a lender and inquires whether they offer the SME debt product they need.
- The lender may ask for the financial details of the entity along with its Udyam/GST Registration for verification.
- The lender would then check the organisation’s credit history and determine whether it is eligible for an SME loan.
- If the organisation is eligible for an SME loan, the lender puts forth the terms and conditions of the loan along with the mode and way of repayment. In case of a Loan against Property (LAP), the lender may seek documents related to the property and conduct an in-person verification.
- Once the verification is complete and the terms and conditions are accepted, the lender would sanction a loan and disburse the loan amount.
- At the end of the tenure, the borrowing facility may either be terminated or renewed.
The process of getting an SME loan is at times very tedious since lenders have different criteria for checking the eligibility of the borrower. A person eligible for an SME loan from one lender may not be eligible for a loan from another lender. Thus, to iron out this inefficiency, you could register yourself on OneNDF and check your eligibility with top lenders and apply for an SME loan in a jiffy.
Recently, Nitin Khandelwal (Founder of OneNDF) shared insights on how OneNDF is assisting SMEs in understanding their financial health in an interview with BadCredit.org.
Eligibility and Documents Required for an SME Loan
While several parameters like the credit score of an entity, its financial stability, nature of business, etc play a role in determining an entity’s final eligibility to get an SME loan from a lender, the following types of entities are principally eligible to get an SME loan-
- Private Limited Company
- Limited Company
- Co-operative Society
- One-Person Company
- Hindu Undivided Family
- Proprietorships
- Partnership firm
- Limited Liability Partnership
- Limited Liability Company
- Any other association of persons or undertaking
Must Read: Explore 7 Types of Company Registration In India
Documents Required
To check the financial history of a business as well as its compliance record, the lenders may ask for the following documents-
- GST Details.
- Passport-size photographs.
- Udyam Registration Certificate.
- Aadhar Card.
- Income Tax Return (ITR).
- PAN Card.
- Bank Statement.
- Utility Bills.
- In case the loan is secured, the documents pertaining to the asset.
Conclusion
SME loans serve as a crucial support net for Small and Medium Enterprises that can utilise the various debt products offered as per their requirements and nature of the business. SME loans like Overdraft facility or Line of Credit allow SMEs to tap into the lender’s facility to ensure timely payments, while Loan against Property or Term loans allow the enterprises to expand their business or consolidate their debt since the tenure in such loans is long.
Specific loan products like Equipment Financing allow SMEs upgrade their machinery or equipment and stay ahead of the curve, carving out a competitive edge.
With each type having its specific use, Small and Medium Enterprises today have numerous avenues to fall back upon.
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FAQs
What is the meaning of SME loans?
SME Loans are business loans customised to cater to Small and Medium Enterprises (SMEs). They may either be secured or unsecured.
What are the examples of SME finance?
Working Capital Term Loans, Line of Credit, Equipment Financing, Loan against Property, Invoice Discounting are examples of SME Finance.
What is the loan limit for SME?
The loan limit for an SME depends upon various factors such as the number of years the business has been in existence for, its credit history, the nature of the business, as well as whether the loan is secured with collateral or not. Usually, an unsecured loan for an SME could go upto INR 70 lakhs from a single lender.
In case, of secured SME loans, the loan limit depends upon the market value of the asset offered as collateral.
Is SME loan secured or unsecured?
An SME loan could either be secured or unsecured. However, a Loan against Property (LAP) is always secured.
What is SME credit risk?
SME credit risk is the risk associated with lending to an SME (Small and Medium Enterprise). The risk could be calculated either on quantitative factors, qualitative factors, or a combination of both.
