SMEs form a crucial part of the supply chain and contribute around 40% of India’s overall exports. They also play an integral role in generating employment in the country. They employ approximately 11 crore people from various parts of India. Interestingly, they have been equally responsible for the country’s rural development as well, with more than half of the SMEs located in the rural areas of India.
Small businesses are essential to the economy. Despite this, many small and medium businesses struggle when it comes to funding. To help SMEs meet their funding requirements, many financial institutions offer loans that cater especially to their needs.
A SME does not have access to the resources that an established business may have. Yet, there may be opportunities for a SME to grow. For instance, a small grocery store may have seen increased demand during the coronavirus pandemic. However, many customers may have purchased products on credit. To keep the business going, the store would need to stock up. An SME business loan could benefit the store, allowing the owner to purchase inventory without waiting for cashflow.
Running a small business in the Indian economic scenario isn’t easy. Many MSMEs struggle due to seasonal constraints in the demand for their products and services. There can be times when they have surplus cash in hand, and at other times, they may find it hard to continue their day-to-day business operations. Sudden shortages of cashflow can prove to be detrimental for any business. However, an MSME loan can be of great help in such situations. A small business owner can avail of an MSME loan and tackle the seasonal shortage of cashflow with ease. Several NBFCs offer a pre-defined loan limit to MSMEs. They can borrow from this loan limit as per their cashflow requirements and the interest would be charged only the amount used by them and not on the entire loan limit.
As mentioned above, an SME or SME business loan has requirements that a small business can meet much more easily than a regular business loan.
The biggest advantage of SME loans are their minimal documentation needs. While a regular business loan may demand property deeds, financial statements, etc. SME loans do not require them. Basic documents like bank statements, GST details and income tax filings, which are easily accessible, are often the only necessities. SME loans are usually disbursed very quickly by lenders. Generally, lenders don’t take more than a week for disbursing SME loans. Some lenders even disburse them within a day or two.
SME loans are often unsecured. This means that they do not require collateral. As an SME owner, you will not have to produce property papers or mortgage business equipment to access funds. Basic proof of business documents works for them and help grow their business exponentially.
Since SME business loans are created specifically to help small businesses, the interest rates are also in line with their affordability. Interest rates are often crafted specifically with a business’ ability to repay in mind, hence ensuring that the deal is fair.
The duration of these loans can also be decided based on the SME’s standard. For instance, many SME loans are short-term, with tenures ranging from one month to 36 months. Repayment is also flexible, with banks offering weekly, monthly or bi-monthly installment options.
One of the most distinct advantages of SME loans is that they are easily accessible. As mentioned above, there are several ways through which a small business can get access to an SME loan. For instance, they can approach a traditional bank or an NBFC, or a Government-appointed nodal agency and authorized financial institution to apply for credit under an SME loan.
To give entrepreneurs the power of choice, India offers different types of SME loans. Some types of loans are issued only when backed by an asset while others do not require such security. The variety of SME business loans available in the market ensures that there is a viable option available for every business owner and no one gets left behind due to lack of access to finance.
Secured loans provide funds in exchange for an asset pledged as security. The asset acts as a safety blanket in case the borrower defaults on repayments. Since the lender has a way to recover funds, the SME loan interest rate on secured loans is relatively low.
One of the most popular types of SME loans are term loans. These secured loans provide finance against assets such as plant or machinery, property and vehicles. Loans are provided for a fixed period of time, at a predetermined SME loan interest rate and have to be repaid at frequent intervals.
Small business owners who may not have business assets to make the cut for term SME loan eligibility can pledge their personal assets to get an instant loan. Residential property, shares, or gold can be used as a security to get an asset-based business loan.
Sometimes, small businesses may need an SME business loan for the short term. Instead of pledging long-term assets as collateral, businesses can pledge short-term or current assets like raw materials, unpaid invoices or short-term securities to secure cash credit facilities. A cash credit facility is usually issued for 12 months and can be used to meet day-to-day expenses or working capital needs.
SME owners can also avail gold loans against gold assets. Gold loans are one of the best options for an SME business, as most often, these companies require a significant amount of capital which can easily be met with the high per gram rates offered. A gold loan calculator can help business leaders quickly calculate the amount of gold they will require for the loan amount that is needed.
Many institutions like banks and NBFCs offer gold loans at affordable interest rates and flexible durations that can meet specific business requirements. Gold loans have varied durations and can be secured against gold assets like ornaments, which are commonly found in most Indian households.
Gold loans also protect borrowers from the risks presented by offering other forms of capital as collateral. Many gold loan companies also offer overdraft facilities that make loans easier and hassle-free for businesses. An overdraft facility allows businesses to pledge their gold once to avail the exact amount of capital required and pay interest only on the amount utilized.
For entrepreneurs who do not have assets for a secured SME business loan, unsecured loans are a feasible option. Since these loans do not require an asset as security, they usually carry a higher interest rate to compensate for the risk of default.
Sometimes, a bank or financial institution can offer surety that they will honor a business’ payment obligation if they fail to do so themselves. It is usually a financial guarantee provided by a bank to a business customer based on the business client’s past financial record. Banks charge a fee to provide a guarantee for repayment.
Many lending institutions in India permit SME owners to pledge their bills, unpaid invoices or promissory notes to get funding. A percentage of the principal is recovered as interest but the business gets quick funds for working capital or short-term financial needs.
PMMY or simply MUDRA loans are government-funded SME business loans that are tailor-made to meet the needs of small businesses. They are unsecured loans, needing no asset backing and can be used for a new business launch or for expansion. MUDRA loans are sanctioned under three schemes: Sishu, Kishore and Tarun with loan amounts of Rs.50,000, Rs.5,00,000 and Rs.10,00,000 respectively.
POS finance is a new-age credit facility. Banks provide POS loans to owners based on the number of credit and debit card swipes they have per month. SME owners can avail this form of credit by simply promoting cashless payments. POS financing is usually a short-term borrowing option with easy repayment options.
Every small business owner needs access to finances at various stages of growing their business. SME loans are there to solve their financial problems but the question is how are they going to get these loans?
Below are the ways through which small business owners can get access to SME loans in India:
Banks are the first option that comes to our mind whenever we think of applying for any type of loan. They are the most traditional form of lenders that provide SME loans for small businesses in India. One can approach any private or public-sector bank to avail of an SME loan. Banks are the most reliable and convenient source of getting money for small business owners. However, availing of an SME loan from a traditional bank has some disadvantages too. Firstly, they have very strict eligibility criteria for providing these loans. Their documentation and verification processes for approving SME loan applications are also quite lengthy. Secondly, interest rates charged by the banks on SME loans are usually on the higher side. They are also less flexible in terms of loan tenure and repayment terms.
NBFCs or Non-banking financial corporations are entities or institutions that offer similar services to that of a bank but do not hold a banking license. As per Statista, there were more than 9,500 registered NBFCs in India on 31st January 2021. Most of these NBFCs provide collateral-free SME loans to small business enterprises. There are several advantages of choosing NBFCs over banks for availing of an SME loan. The most notable one is that NBFCs usually have flexible eligibility criteria for approving SME loan applications as compared to banks. They usually follow a relaxed approach to ensure easy financing for small business owners. One can easily qualify to avail of anSME loan with an NBFC even with a slightly lower credit score and negligible business experience. Also, the interest rates levied by NBFCs are lower than that of banks. It’s because NBFC’s interest rates are stipulated as per the Prime Lending Rate (PLR), which is not regulated by the Reserve Bank of India (RBI). Hence, they enjoy greater flexibility and vary their SME business loan interest rates to attract a larger customer base.
The central Government of India and various State Governments have introduced several credit schemes to help SMEs grow and flourish. To avail of funding through any of these schemes, one needs to approach the authorized financial institutions or central nodal agencies appointed by the Government to manage their schemes.
The primary benefits of availing of an SME loan under the Government schemes are that they are reliable, easy to get, and come with very low-interest rates. The purpose of these loan schemes is only to help small business owners and not to make any revenue out of it. The Government usually provides SME loans under these schemes at subsidized interest rates.