Coming up with aspiring career ideas might be the first step in an entrepreneur’s journey, but taking the next step to materialize the idea remains crucial. Many entrepreneurs tend to dismiss their world-changing ideas when they realize that they may need to raise capital or take a loan to kick-start their careers.
Most problems arise when loan requests are rejected due to inadequate collateral options and without a proven track record. To facilitate fledgling entrepreneurs and to support promising ideas, the government of India offers the option of SME loans. These loans are collateral-free and offer benefits like subsidized interest and flexible repayment plans. This article explores what are SME Loans and the various types available in India.
What Are SME Loans And Its Benefits
SME loans are specifically tailored only for small and medium enterprises. Small and Medium Enterprises that require capital to start their business can opt for such loans with or without the need to provide any collateral. This in turn helps kick-start the business that can later be expanded and provide a healthy cash flow and firm infrastructure. Thus, SME loans enable aspiring minds to trust the process and provide them with capital with flexible repayment options.
Types Of SME Loans Available In India
Micro LAP & LAP (Loan Against Property)
A Loan Against Property (LAP) is a secured loan for SMEs and MSMEs, allowing them to pledge commercial or residential property as collateral. Key benefits include loan amounts up to 50-70% of property value, repayment tenure up to 7-20 years, and flexible repayment options.
Asset-Based Business Loans
SMEs in India often have difficulty obtaining timely collateral-free loans. Consequently, many lenders offer loans secured by business and personal assets. The loan amount is based on the market value of these assets. These secured loans usually have lower interest rates compared to unsecured loans. Assets used as collateral can include shares, property, gold, and business assets.
Rural Loans
Rural credit supports individuals, farmers, and businesses in rural areas. It is vital for agricultural development, rural entrepreneurship, and economic well-being. With rural credit, farmers can invest in seeds, equipment, and technology, increasing productivity and contributing to agricultural growth.
Pradhan Mantri Mudra Yojana
Pradhan Mantri Mudra Yojana scheme by the Indian government provides credit to non-agricultural SMEs through three initiatives: Sishu, Kishore, and Tarun. Sishu offers loans up to Rs. 50,000, Kishore up to Rs. 5,00,000, and Tarun up to Rs. 10,00,000, all without the need for collateral or security.
Term Loans For Working Capital
SME loans are available as long-term loans for fixed assets like buildings, land, and machinery, or short-term loans for working capital. Interest rates, amounts, and tenures vary among lenders, with some offering fixed and others floating rates. Repayment is typically through EMIs, and term loans are disbursed quickly, often within 48 hours.
Cash Credit
Many banks and NBFCs offer cash credit facilities to SMEs against fixed asset collateral. Business owners can pledge stock, raw materials, account receivables, or unpaid invoices. Lenders provide credit as an overdraft, based on the value of the pledged assets. The overdraft amount remains constant over time.
Lender Guarantee
Entrepreneurs can access various guarantees, such as financial, deferred payment, advance payment, foreign, and performance guarantees. Lenders offer these to their existing customers based on their needs and past transactions, sometimes with associated charges. These guarantees assure customers and suppliers that the entrepreneur will fulfil their contractual obligations.
Invoice/Bill Discounting
Business owners can obtain working capital by converting current assets into cash. Many institutions offer loans by discounting promissory notes, bills of exchange, or unpaid invoices before their due dates. The borrower sacrifices a percentage of the principal amount as a discount. This method is quicker and easier than others and results in minimal debt burden.
What To Know Before Availing SME Loans?
- Do Your Homework
Having a game plan before applying for a business is always helpful. To do so, one must make sure that they have all the details regarding their business laid out. That means considering what kind of loans and capital would be required. This kind of preparation also helps when explaining to the loan officer who can then guide better.
- Business Loan Tenure and Repayment Amount
Understanding different business loans and their loan tenure can help optimise the process of repayment. Choosing flexible loan terms over a healthy period can benefit during the repayment phase.
- Repayment Plan
Having an understanding of a repayment plan beforehand is a great practice. Knowing personal financial history and proof of income are two factors that are considered when drafting this repayment plan. So it’s vital that professionals keep the numbers realistic and not overcompensate their requirements.
- Interest Rates and APR
The interest rate is crucial in a business loan application. Even a one percent change can greatly affect the loan amount and EMIs. Also, check the annual percentage rate (APR), which provides a clear picture of yearly repayment, including interest, processing, and service charges. This helps understand all charges along with the interest rates.
- Documents and Business Plan
Lenders typically require businesses to be established for 3 to 5 years for a loan. Online applications need bank statements, ITR files, cash flow statements, GST, and Incorporation Certificates. Entrepreneurs can find assistance regarding this procedure.
- Tax Benefits
The Indian government offers schemes for entrepreneurs to access favourable business loans and tax benefits. Programs like MUDRA Loans, Stand-up India, and CGTMSE provide such benefits. One can apply for these loans online to enjoy tax breaks and pursue their passion.
- Check Business Loan Eligibility
One crucial factor in getting approved or rejected for a business loan is credit score. A score above 750 is good, and 900 is excellent, according to credit bureaus. This score depends on factors like loan accounts, timely payments, financial history, and spending consistency. Aiming for a good score will be beneficial for loan approval.
Summing Up
SME loans provide entrepreneurs with the opportunity to invest in themselves and kick-start their careers without having to worry about collateral. With flexibility in repayment plans and structures, lenders like NBFCs allow these complications to be overcome.
FAQs
Who is Eligible for SME Loans?
Any SME that generates income is eligible for SME loans under the Pradhan Mantri Mudra Yojana. An already-running business with a net worth of 1 cr or a business running for more than 3 years is automatically eligible for these loans as well.
What is the Maximum Loan Amount for SMEs?
The limit range for loan amounts for SMEs is between Rs 5 lakhs and 5 cr. However different finance sectors can offer flexibility outside the range.
What is the Age Limit for SME Loans?
One has to be of the age of 21 years or above to apply for SME loans. Likewise, one has to not exceed the age limit of 65 years during the repayment period.
What is the Limit of Collateral Free Loan in SME?
SME loan scheme covers collateral-free loans for small and medium businesses up to 100 lakhs per borrowing unit.
