What is an SME Loan?

Updated on: Nov 21st, 2023


5 min read

The term ‘SME’ stands for Small and Medium Enterprises in terms of business. They contribute to 40% of India’s exports and stand next to agriculture as the second most practised occupation. SMEs have been providing a massive deal to the country’s economy. A firm is identified as an SME based on the investment and the sector of the enterprise. The table below gives further details.


Investment on Plant, Machinery, and Equipment*

Annual Turnover*

Small Enterprises

Up to Rs.10 crore

Up to Rs.50 crore

Medium Enterprises

Up to Rs.50 crore

Up to Rs.250 crore

*As per the government notification dated 1 June 2020 w.e.f. 1 July 2020.

1. What Does an SME Loan Mean?

An SME loan, a type of business loan, is designed for those who are planning to start their own business to make a progressive impact on the industry and society. Such credit facilities make it easier for promoting and supporting local industries and the overall economic growth of India.

The borrowers must repay the loan amount at a fixed interest rate. SME loans stand as the best option to raise funds for anyone who is looking to start a business and for medium enterprises to further expand their business. There are many lenders in the market, and multiple attractive offers are available. Usually, a well-designed business plan is all it takes to get a loan in the range of Rs.5 lakh-Rs.5 crore.

Under SME loans, there are several types, such as working capital loans, term loans, equipment loans, Pradhan Mantri Mudra Yojana Stand Up India scheme, and others.

2. Advantages of Taking an SME Loan

  • SME loans include flexible repayment tenures ranging from 12 months to 60 months.
  • No need for collateral to avail SME loans.
  • Quick and easy online application process and shorter approval time.
  • Minimal documentation requirements.

3. Fees and Interest Rates Applicable

  • Processing Fees: Different lenders may offer SME loans for different processing fees. Try to choose the lender who provides the loan at a small processing fee.
  • Interest Rates: The interest rate may vary based on the loan scheme you want as well as the financial institution. The lender may also consider factors, such as collateral provision, loan amount, tenure, and the applicant’s creditworthiness, repayment capacity, as well as other existing loans. Usually, it may range from 8.40% p.a. to 24% p.a.

4. Eligibility Criteria

Though the specific eligibility criteria may vary among lending institutions, they mostly have a set of essential rules for SME loans. Please take a look at the particular lender’s criteria before applying to reduce the possibility of rejection.

  • Purpose: The purpose of the loan application must be to meet business requirements, such as purchasing machinery or raw materials, availing working capital, marketing products/services, expanding the employee base or product line, entering a new geographic location, and many more.
  • Age: The applicant’s age must be between 25 years and 55 years.
  • Experience: The applicant must have a minimum of three years’ business experience.
  • Proof: The applicant must provide at least the past year’s business IT returns.

5. How to Apply?

Once you choose the lender to apply for SME loan, you have to collect the SME loan application form from that lender. However, the following fields can be expected.

  • Name of the company
  • Date of incorporation
  • Registration address of the company
  • Operating address of the company
  • Contact number and e-mail address of the company
  • Industry code
  • Permanent Account Number (PAN)
  • GST number

6. Documents Required

  • Bank account details
  • Existing loan details if any
  • Parent company/associates/group entity details
  • Annual accounting report with relevant profitability/liquidity-oriented details
  • Personal guarantee letters from directors/partners/promoters
  • Business registration documents
  • Registration certificate of business as SME
  • A copy of sales tax returns filing documents
  • A copy of income tax returns filing documents
  • Any sector-specific licenses, such as drug license in the case of a pharmaceutical enterprise

7. FAQs

Q. How is my ability to repay SME loan EMIs calculated? A. Lenders prefer that the ratio of your SME loan EMI to your income be at 25%. This ratio is also called Debt-to-Service Ratio. It only means that you can use the 75% of your income for other commitments so that there is still room for you to pay off the monthly instalments without straining finances.

Q. Can I close the loan before the stipulated tenure? A. You can pay-off your loan before the stated tenure. There are no restrictions on this.

Q. Can I apply for SME loan online? A. Many lenders provide you with a gateway to apply for SME loan online. All you have to do is, visit the lender’s website and search for SME loans section. After reading through the loan details and eligibility criteria, click on the ‘Apply Now’ button. Provide all the information asked for and the copies of documents necessary to apply for the loan. Voila! The bank representative will contact you regarding your enquiry within the specified wait time.

Q. What kind of entities are eligible for SME loans? A. Entities, such as sole-proprietorship firms, private limited companies, partnership firms, and public limited companies are eligible to apply for SME loans.

Q. Can I avail an SME loan for pre-shipment and post-shipment support? A. Yes, you can avail SME loans for pre-shipment and post-shipment support in addition to purposes, such as meeting performance, fulfilling financial obligations, purchase of commercial assets, business expansion, and for meeting working capital requirements.

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Quick Summary

SMEs contribute significantly to India's economy. SME loans are beneficial for startups and medium enterprises. They offer advantages like flexible repayment and no collateral requirements. Interest rates range from 8.40% to 24% p.a. Eligibility criteria include age, experience, and proof of business returns. Applying for an SME loan requires specific documents. Repayment ability, tenure flexibility provided. Online application options available.

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