A business starts with a dream/idea but can drown if it lacks vision and planning. SMEs (Small and Medium Enterprises) or MSMEs (Micro, Small and Medium Enterprises) is one of the major economic boosters for developing countries.
In such a scenario, often, lack of finance is a critical barrier to their growth. SME finance gaps worldwide must be addressed to solve the issues of economy, unemployment, and poverty.
The International Finance Corporation (IFC) estimates that around 65 million firms, i.e., 40% of MSMEs in developing countries, have an unmet financial need of $5.2 trillion every year. This is 1.4 times the current global SME loan given to them.
WHAT ARE SME LOANS?
SME loan or SME finance is the loan offered to Small and Medium Enterprises to meet their business requirements like expansion, inventory, and other financial needs. Any new business with time needs surplus capital to grow and further earn profits. It can be for:
- Working capital
- Investment in inventory
- While at first, investing your own savings or asking from friends and family is feasible. But later, as the business gathers traffic, a loan becomes essential. It can give a positive kick to keep the business on the radar if used at the right time.
MISCONCEPTIONS ABOUT SME LOANS
Loan sounds like a scary idea, especially in a developing country like India. Many business owners or entrepreneurs prefer investing their own money to avoid the possible threats of a loan. It could be fear of:
- Interest rates
- Inability to repay if the business collapses
- Being accountable to a third party
- Losing one’s independence
- There can be several reasons to distrust loans when starting a new business. But in reality, SME loan is the best way to make the business thrive and flourish without exhausting one’s personal resources.
WHERE CAN YOU AVAIL THE SME LOAN?
- Banks (Online/Offline)
- NBFC (Non-Banking Financial Companies: Online/Offline)
INTEREST RATES AND COLLATERAL
Interest rates vary according to the bank and NBFC, but the minimum rate provided under Government Loan Scheme is 8.40%, and it can go up to 24% per annum. It varies depending on:
- The loan amounts
- Provision of collateral
- Tenure for repayment
- Applicant’s credibility
- Applicant’s repayment capacity, etc.
- Usually, SME loans are unsecured, which means there is no collateral needed for them.
The eligibility criteria defined by lenders do vary, but most of the lenders focus on some common points:
|Who is eligible to apply?||Self-employed individuals, sole proprietor firm, partnership firms, private limited companies in trading, manufacturing, and services.|
|Age limit||The minimum age is 21 years. The maximum age is 65 years at the time of loan maturity.|
|Minimum annual income||Rs.1.5 lakh|
|Minimum turnover||Rs.40 lakh|
|Business existence tenure||Minimum 3 years in the same line, overall 5 years of total business exposure.|
|Business profit status||Should have made profits for the last 2 years.|
|Business credibility||Should not come under excluded/blacklisted list for SBA finance.|
|Business location||Should not fall in a negative location list.|
However, certain organizations like NGOs, trusts, and charitable organizations are excluded from SME finance.
LOAN OPTIONS AMONG SMEs
For a business to thrive, a stable flow of cash is vital for newer innovations and expansions. Once the SME loan is approved, it can be withdrawn anytime.
This works as additional working capital to the business and is also flexible according to the varying demands and needs of the company. Several loan options are covered under SMEs:
- Term Loans:
Term loans are for long term planning and their expenses. The repayment of such loans varies over 5 to 15 years. In some cases, with certain banks, it is also possible to get these loans without collateral.
- Working Capital Loans:
In the regular operations of a business, there are many ups and downs regarding temporary losses, sudden demands, machinery upgrades, etc. In such cases, a working capital loan ensures the smooth functioning of a business, as its regular expenses are met through it.
Thus, the business can still focus on growth and annual plans instead of getting a sudden setback.
- Equipment Loans:
Manufacturing units or services, both require equipment in the form of machinery, computers, vehicles, etc. SME loans from banks or NBFCs offer up to 25 crores with particularly lower interest rates. The reason for it is because equipment serves as collateral for them.
- Demand Loans:
A demand loan has an agreement with the borrower and lender that at any time, the loan can be repaid. The time duration depends on their mutual understanding. It works well for both parties as the lender has the reassurance of demanding repayment, whether to pursue further investments or recover his principal. And the SME can have the flexibility of repaying in full or in part at any time, without penalty.
- Deferred Payment Guarantee:
Banks issue a DPG, which is a guarantee for payment on instalments, which have been postponed.
Apart from these options of SME loans, there are several Government of India schemes like the Pradhan Mantri Mudra Yojana (PMMY) and Stand Up India Scheme to help the small businesses grow. Under PMMY, it becomes easier to avail of working capital loans. And The Stand-Up India scheme is specially designed for the Scheduled Castes and Tribes and Women entrepreneurs.
There are many banks and NBFCs which offer online as well as offline SME finance. They can be easily approached with the right documents and credit score in some cases.
|Identity Proof||Passport, Aadhar Card, Driving License, PAN card, Voter’s ID, etc.|
|Address Proof||Aadhar Card, Voter’s ID, Passport, Driving License, Bank Passbook, etc.|
|Business Proof||Business entity proof, Partnership deed, Incorporation certificate, Articles of association, Shops, and other establishment certificate.|
|Business/Company Financials||Audited/Provisional financials – VAT returns, tax reports, balance sheet, profit and loss, sales tax and GST related documents, bank statements, etc.|
|PAN Card||Of business entity and partners/promoters/shareholders.|
|Application Form||Duly filled and signed.|
|KYC documents||Of owners/partners/shareholders.|
DOCUMENTS REQUIRED ADDITIONAL (PROJECT ORIENTED BUSINESS)
- Document of building and land allotted
- Government approval of land usage/conversion
- Price quotation of machinery supplies
- Building blueprints
- SSI registration
- Marketing plans
- Documents of power installation
- Project report in details
- NOC from the pollution department
- Title deeds of collaterals
- List of machinery and process flow of manufacturing systems
- SME loans are flexible in terms of tenure, limits, and investment areas. When the SMEs/MSMEs grow, it not only helps the individual but the whole country. It can create more employment opportunities, boost the GDP, and make each country self-sufficient.
Some banks even provide the export credit facility, which enables entrepreneurs in a foreign location to arrange the time of loan payment.
To enhance the credibility of a small business with SME finance, banks also issue a SLOC (Standby letter of credit). So research now and choose your best suited SME loan provider!