India has been in the global spotlight recently on account of the economic progress it has been experiencing. According to a McKinsey Report, India stands to hold the third spot as a progressive GDP growth giant in the year 2030. One of the most critical factors behind the economic growth of India is its thriving business environment. SMEs and MSMEs have gained noticeable traction as investors and the government are also interested in funding startups and nurturing innovative ideas.
While initial funding in a startup is usually personal capital or investor aligned, SME loans are a powerful tool for any company that suffers from a liquidity crisis or is willing to expand in the market.
Here’s how banks and non-banking financial companies (NBFCs) categorize the small medium business segments:
For a manufacturing firm, the total value of capital should be INR 25 Lakhs. In case of a service sector organization, the value of total capital can be INR 10 Lakhs
The range of capital value for a manufacturing firm can be INR 25 to 500 Lakhs. In case of a service organization, the range is INR 10 lakh to 200 lakh
The range of capital value for a manufacturing firm can be INR 500 lakh to 1000 lakhs. Moreover, for a service organization, the value ranges from INR 200 to 500 Lakhs.
Government Plans for Banks Regarding SME Lending
From the total funds allocated for lending to SMEs, at least 60% of the funds should be specifically used for lending to Micro-firms. Out of the 60% that goes towards Micro-firms, 20% should go towards micro-manufacturing organizations with an investment range of Rs. 5-25 lakhs and 40% should go towards firms with an investment of 2 lakhs (service sector) or 5 lakhs (manufacturing sector).
Eligibility Criteria and Documents Required
Among these different sizes of firms, banks also offer firms, SME Business loans after they have passed this eligibility criteria which changes slightly from bank to bank:
- The SME should have been profitable in the last two years
- The applicant firm can be a manufacturing unit, sole proprietorship firm, partnership firm, or a public/private enterprise.
|Recent Financial Statements of the firm|
|A list of owners/shareholders|
|A copy of relevant identification of owners (passport, aadhar card, ration card, voter IDs)|
|A stamped copy of memorandum of association|
|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 land conversion|
|Building blueprints by the architect|
|Cost quotation of machinery suppliers|
|Power installation documents|
|Title deeds of assets and other collaterals|
|Descriptive project report|
|No Objection Certificate from department of pollution|
|A clear list of plant and machinery installed within|
|The process flow of manufacturing systems|
Benefits of SME Business Loans
Any growing business requires 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 expand by allowing the ability to take bigger orders or buy better machinery.
Many Banks and NBFCs offer loans to small businesses without collateral, which is an easy and low risk option for getting financial help. Small business can also choose between the loan options like term loans, demand loans, and a deferred payment guarantee. Furthermore, some banks also provide the facility of export credit, which enables borrower in a foreign country to flexibly arrange the time of loan payment. To facilitate smooth agreement and credibility, banks also issue a standby letter of credit (SLOC) if a firm has availed an SME loan.
Also Check: Latest Business Loan Interest rates
What Are the Different Loan Options Among SMEs?
Working Capital Loans
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, that 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 25 years. Furthermore, some banks also provide term loans without provision of a collateral.
Manufacturing businesses require modern equipment to stay ahead of its 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 its 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 as collateral in the loan, the interest rate for this type of loans are low.
Pradhan Mantri Mudra Yojana
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 Pradhan Mantri Mudra Yojana for different range of amount:
- Shishu Loans are the basic category which provide loans of up to INR 50,000
- Kishor category is a notch higher and provides loan amount ranging from INR 50,000 to INR 5,00,000
- Tarun Category loans are the highest category of PMMY loans which provide an amount from INR 5,00,000 to INR 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. The calculation of interest only begins when a firm starts withdrawing money.
Stand Up India
This is a 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 this scheme, entrepreneurs can avail a loan amount of up to INR 1 crore.
Interest Rates for Availing SME Loans
While every bank or NBFC might charge different interest rates for providing loans to SMEs, the approximate interest rate provided is 12%. The interest rate charge for your SME loan will depend on different conditions like provision of collateral, loan amount, and tenure of loan. Nowadays, banks also provide businesses the option to opt for a fixed interest rate or a floating interest rate. By applying a floating interest rate, banks can secure themselves against any changes made by the bank in future regarding interest rates. They can also benefit from a decrease in the interest rates if they select this option.
How to Apply for an SME Loan?
Every bank or NBFC will have a form which requires to be filled. 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 firm
- E-mail address of 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
- Ongoing Loans/Debts
- Any other financial service applied for
- Brief regarding security of 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)
List of Banks and NBFCs that provide SME loans
- SBI Bank
- SBI Bank
- IDBI Bank
- Bajaj Finserv
- HDFC Bank
- Axis Bank
- PNB Bank
- Bank of India
- Bank of Baroda
- Canara Bank
- Indian Bank
- Union Bank of India
- Tamilnadu Mercantile Bank
- Small Industries Development Bank of India (SIDBI)
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, for purchasing equipment, as well as special loan offer for female entrepreneurs.
Note: It has been announced by the Government of India on 1st July 2017 that while availing an SME loan, you will be charged with an 18% GST on any banking service or product.