Types of SME Loans

Immediate funding is an integral requirement of any business for performing its core functions like expansion, recruitment, hiring, procurement, training and so on. SME Loans play a pivotal role in an entrepreneur’s attempt at managing uncertain/unplanned situations or bearing a loss without disturbing the allocated running costs.

SME Loans

Salient features

  • Quick disbursal
  • Flexible repayment options
  • Competitive pricing (based on credit scores)

Eligibility

The banker/lender will check for these aspects before granting an SME loan:

  • Purpose of the loan
  • Duration of the loan
  • Repayment capacity
  • Collateral security

Documents required for applying for an SME loan

  • Bank statements for the last 12 months
  • Updated KYC details of the organisation and the applicant
  • All financial documents asked for by the lending organisation
  • Shop establishment certificate
  • Invoice against which finance is to be raised
  • Partner information

Popular SME loans in India

  • Term Loans
  • Cash Credit Facility
  • Pradhan Mantri MUDRA Yojana (PMMY)
  • Bank Guarantee
  • Asset-Based Business Loans
  • Bill/Invoice Discounting
  • Point of Sale Finance

Types of SME loans offered by FinanSME

FinanSME provides various kinds of loans to promote the MSME sector because we understand that the small-scale sector is the lifeline of the country and contributes to 45% of India’s manufacturing and 40% of India’s export.

Some of the loans in our array are explained below.

  1. Secured and unsecured loans

Description

A loan issued against collateral security is called a secured loan. The loan issued by the bank or financial institution without keeping any collatoral security is called the unsecured loan. Secured loan attracts lower interest rates as compared to unsecured loans because of the limited risk involved.

Entrepreneurs typically have specific objectives behind applying for secured loans, such as the purchase of an asset, long-term investments, expansion of office space and so on. An unsecured loan is used to meet the short-term needs of the business, such as working capital.

Primary lenders

  • Secured and unsecured credits are primarily issued by banks and non-banking financial corporations (NBFCs).
  • Unsecured loans are majorly granted by private lenders and other alternative sources.
  • The criteria pertaining to the credit amount, interest rate, value of collateral and the like varies for each institution.
  • Revenue-based finance (RBF)

Description

Generally, revenue-based finance is offered by private investors to small businesses to meet their most urgent capital expense requirements. Under this scheme, the borrowers promise to pay a percentage of their gross monthly income towards the loan repayment.

Distinctive features

  • Amount to be repaid is usually expressed as a simple multiple of the loan amount.
  • EMI or fixed duration is variable as repayment is based on the revenue.
  • Revenue-based finance can be both secured and unsecured as per the agreement between the borrower and the lender.
  • Lenders/stakeholders can apply restrictions to the terms/conduct of business operations. They can also attach covenants to the loan agreement.

Primary lenders

  • Private investors
  • MNCs

Who can apply

Businesses that are unable to secure traditional finance for reasons such as low credit rating or an inability to provide collateral may opt for RBF.

  • Government loans

Description

The MSME sector is a significant contributor to India’s GDP and employment generation. It employs around 106 million people or 40% of India’s workforce. To boost the performance of MSMEs, the government offers loans to help improve their status.

Loan distribution

  • These loans are disbursed through Government organisations, NBFCs and scheduled banks
  • The purpose may be to fund working capital, finance specific projects and many others
  • Government loans are usually offered on easier terms as compared to private financing.

Prominent institutions

The major institutions offering government loans to MSMEs are as follows:

  • National Bank for Agriculture and Rural Development (NABARD)
  • Micro Units Development and Refinance Agency (MUDRA)
  • Small Industries Development Bank of India (SIDBI)
  • Loans are also available at low rates from certain banks like SBI.

Who can apply

Small-scale businesses that find it challenging to afford traditional funding due to high interest, high collateral requirement or low credit rating can apply.

  • Subsidised loans

Description

Subsidised loans are those under which the government offers a subsidy for loan repayment to small businesses. Subsidised loans are issued primarily by private lenders, banks and NBFCs. These loans are sanctioned under government initiatives to boost MSMEs, and the schemes vary in terms of eligibility, subsidy amount and purpose for which it is issued.

Primary lenders

These loans are sourced for lenders in the open market.

Process

  • Under the subsidised loan scheme, the borrower applies for a loan with the lender and has to submit an application for a subsidy to the government.
  • The government grants a loan based on the scheme. The amount of subsidy will be defined as per the scheme and the agreement between the three parties. Subsidy here means the percentage of interest or loan amount to be repaid by the government.

Who can apply

Subsidised loans are prominently applied by start-ups who face challenges in meeting their business funding and are unable to repay their loan amounts.

Producing Rs 20 lakh crore of goods and services annually, MSMEs contribute as much as 40% to India’s GDP. Loans are major drivers to accelerate their pace, which is promoted by both public sector and private lenders.

FinanSME is a one-stop destination that aids MSMEs in sourcing low-cost credit for businesses and helps them in their financial decision-making. Contact FinanSME for a consultation now.

About the Author
Finansme
Finansme | 29 Articles

We believe there is a need for easing the operating environment for the Micro, Small And Medium Enterprises sector. Access to finance, redefining investment limits, could transform MSMEs into a hotbed of entrepreneurial activity.