SME loan (Small and Medium Enterprise loan) is a type of term loan or working capital loan offered to meet daily business requirements, to start a new business and for business expansion purposes. SME loan is majorly availed by start-ups, existing entrepreneurs and business owners, SMEs, sole proprietorships, partnership firms, limited liability partnerships and many other business entities.
Interest Rates for Availing SME Loans
While every bank or NBFC might charge different interest rates for offering business loans to SMEs, the lowest interest rate provided under Government Loan Schemes is 8.50% p.a. onwards or even lower. The interest rate charged for an SME loan will depend on different conditions like the provision of collateral (if applicable), loan amount, repayment tenure, and applicant’s profile, creditworthiness, and repayment capacity.
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How to Apply for an SME Loan
Every bank or NBFC will have a loan application form that requires to be filled out. Some of the common details that are required in these forms are:
- Name of Company
- Date of firm creation
- Address of the firm
- Operating address of the firm
- E-mail address of the firm
- Contact Details
- Sector/Industry code
- Permanent Account Number
- GST No.
When you apply for a loan from any financial organization, it is common that they will require certain financial details regarding your current debts and background. These are some of the commonly required details:
- Bank A/C details
- On-going Loans/Debts
- Any other financial service applied for
- Brief regarding the security of the facility
- Details of parent company/associates/group entities
- All relevant profitability/liquidity-oriented details mentioned in an annual accounting report
Apart from financial details, you are also required to mention certain legal details necessary for processing:
- Documents regarding registration of firm/shop/manufacturing unit
- Registration certificate of the firm under MSME
- Copies of sales tax-return filing documents
- Copies of income tax-return filing documents
- Drug license (if running a pharmaceutical manufacturing/selling enterprise)
Here’s how banks and non-banking financial companies (NBFCs) categorize the small-medium business segments:
|MSME – Merged Criteria: Investment and Annual Turnover|
|Sector/Enterprise Type||Small Enterprise||Medium Enterprise|
|Manufacturing & Services Sector, Both||Investment less than Rs. 10 crore
Turnover up to Rs. 50 crore
|Investment less than Rs. 50 crore
Turnover up to Rs. 250 crore
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Among these different sizes of firms, banks also offer firms, SME loans after they have qualified the below-mentioned eligibility criteria which slightly vary from bank to bank:
- Minimum business vintage should be atleast 1 year
- SME should have been profitable in the last 1 years
- Annual Turnover and Profitability criteria shall be defined by the lender
- The applicant firm can be a manufacturing unit, a sole proprietorship firm, partnership firm, or a public/private enterprise
- Good credit score
- No previous default with any financial institutions
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- Recent Financial Statements of the firm
- A list of owners/shareholders
- A copy of relevant identification of owners (passport, aadhar card, ration card, voter’s ID card)
- A stamped copy of the Memorandum of Understanding (MoU)
- Photographs of owners/shareholders/partners
- IT returns of last 3 years
- Sales tax/GST related documents
Documents Required for Project-Oriented Businesses
- Documents of land & building
- Government approval of the land conversion
- Building blueprints by the architect
- Cost quotation of machinery suppliers
- Marketing Plan
- SSI registration
- Power installation documents
- Title deeds of assets and other collaterals
- Descriptive project report
- No Objection Certificate from the Department of Pollution
- List of plant and machinery installed within
- Process flow of manufacturing systems
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SME Loan Types
Every business requires constant liquidity for conducting business as efficiently as possible. In order to ensure that there are no obstacles in the regular operations of a firm, many firms avail working capital loans. Not only do they help in handling temporary financial crises, they also allow businesses to focus on growth while the regular expenses are managed through a loan.
When you have planned long-term expenses but find it challenging to set aside an amount for it, which is where term loans come into the picture. They are long-term loans that are usually borrowed for a certain purpose. The available duration of payback for term loans ranges from 5 years to 15 years. Furthermore, some banks also provide term loans without provision of collateral.
Manufacturing businesses require modern equipment to stay ahead of their competitors in the market. Equipment loans are specifically provided by banks and NBFCs to buy new machinery for a firm. Equipment financing helps businesses grow and explore their potential by providing loans of up to 25 crores. While the limit is higher, SMEs usually do not require a higher amount for equipment financing. As the equipment in question is considered collateral in the loan, the interest rate for this type of loan is low.
The Government of India considers that small business requires investment and financial help to truly realize their potential. Taking this into consideration, the government has introduced the PMMY scheme which is specifically designed to serve SMEs and MSMEs of all types. There are 3 categories within the Pradhan Mantri Mudra Yojana for different ranges of amounts:
- Shishu Loans are the basic category that provides loans of up to Rs. 50,000
- Kishor category is a notch higher and provides loan amounts ranging from Rs. 50,000 to Rs. 5,00,000
- Tarun Category loans are the highest category of PMMY loans which provide an amount from Rs. 5,00,000 to Rs. 10,00,000
The key advantage of this type of loan is that you can use this loan amount flexibly into working capital needs, machinery, as well as vehicles.
This is an SME loan option that is specifically designed for entrepreneurs that belong to a scheduled caste or scheduled tribe. This scheme’s benefits are also extended to female entrepreneurs. Under the Stand-up India scheme, entrepreneurs can avail a loan amount between Rs. 10 lakh and Rs. 1 crore. At least 51% of the shareholding stake should be held either by an SC/ST individual or a woman entrepreneur in the case of non-individual enterprises.
List of Popular Banks and NBFCs offering SME loans
- Axis Bank
- Bajaj Finserv
- Bank of Baroda
- HDFC Bank
- ICICI Bank
- IDBI Bank
- Indifi Finance
- Kotak Mahindra Bank
- Lendinkart Finance
- PNB Bank
- SBI Bank
- Small Industries Development Bank of India (SIDBI)
- Union Bank of India
- Yes Bank
All of these banks provide different types of loan offerings that help SMEs in different areas. For instance, SIDBI offers different loan options for availing micro-credit, purchasing equipment, as well as special loan offers for female entrepreneurs.
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Any growing business requires a constant flow of cash to ensure healthy development and effective decision-making abilities. Furthermore, the amount available through an SME loan can be withdrawn at any time, providing financial flexibility to businesses. One of the critical purposes of an SME loan is to act as an additional working capital, which can help a business in expansion and allows them to take bigger orders or buy better machinery.
Many Banks and NBFCs offer loans to small businesses without collateral or security, which is an easy and low risk option for getting financial help. Small business can also choose between the loan options like working capital loan, term loans, overdraft.
Q: What is the loan amount offered by banks and NBFCs to SMEs?
Ans: The minimum loan amount offered has no limit whereas the maximum loan amount depends on the
business requirements and credit score, financial history and repayment capacity of the applicant.
Q: What is the interest rate offered by government loan schemes to SMEs?
Ans: The interest rate offered under government loan schemes and offered by banks starts from 8.50% per annum.
Q: Can I foreclose my loan amount?
Ans: Yes, you can foreclose your loan account by paying foreclosure fees to the respective bank or NBFC.
Q: What is the repayment tenure of the SME loan?
Ans: The repayment tenure of an SME loan ranges from 12 months to 120 months.
Q: Which type of interest rate is offered to SMEs?
Ans: Interest rates offered by SMEs could be fixed or floating depending on the bank and NBFC.
Q: Do I need to submit any collateral or security to avail SME loan?
Ans: No, you are not required to submit any collateral or security as SME loans are unsecured loan and
even third party guarantee is not required.