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.

All Articles

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  2. There are several business loan schemes designed and offered by Bajaj Finance to cover the needs of businesses across micro, small, medium and large entities.
  3. In this article, you will learn about the financing facilities offered by Axis Bank to small, medium, and large businesses. That is the details on schemes, rates, eligibility criteria, documents required, and common questions related to Axis Bank business loans.
  4. Focusing on the MSME sector, here is everything you need to know about Union Bank of India’s loan schemes, interest rates, eligibility, documents required, and more.
  5. Indian Bank has taken over Allahabad Bank recently, and all the customers of the latter bank are now among the customer base of the former bank. The bank offers several MSME loans and corporate loans for the benefit of its customers.
  6. Bank of Baroda provides financial support to those who are looking for financial independence and a way to earn their living. Here’s everything you need to know.
  7. Bank of India offers multiple business loan schemes designed for specific purposes for different kinds of small to medium scale businesses. Read on to know the details.
  8. Aditya Birla Finance Limited (ABFL) is a renowned lender that provides financing to small and medium-sized businesses (SMEs). Here’s everything you should know.
  9. How should you choose the revolving line of credit that is right for you? Is it better to go with a trusted bank, or should you try your hands with an NBFC?
  10. Businesses go through many phases and are very volatile when it comes to the cash at hand to fund the daily operations. No matter what reason you require financing for, Flexi business loans are at your aid.
  11. Similar to the mortgage loans we come across in personal finance, businesses have secured loans. Know more about secured business loans here.
  12. Wondering what a term loan is? Do you think all the loans out there in the market are term loans? Read through to know how term loans function for businesses.
  13. Machinery loans are one such type of loans that can be taken to purchase machinery. Here is all that you need to know about machinery/equipment loans.