1. Overview

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Small and Medium enterprises (SMEs) are a crucial segment of the Indian economy making up for about forty percent of the total exports in the country. Growing from the smallest units to becoming giant corporations, the SME industry has aimed at economic growth and generating employment opportunities for its population. However, despite all this, these SMEs struggle with financial hardships to continue their business operations or grow their business over time. To alleviate this problem, the Government of India has introduced several measures to make more credit facilities accessible in a quick manner. Read further to discover more about SME loans, their purpose and types, SME benefits, eligibility and process to make application. 

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2. SME Loans: Meaning and Purpose

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SME loans are credit facilities that are designed to assist micro, small, and medium businesses by providing financial support for a wide range of purposes tailored to their specific needs. Banks, Non-Banking Financial companies, and other private lending institutions offer a range of various credit facilities like seed capital, working capital, assets, equipment loans, term loans, etc. as credit facilities in India.

Here’s a brief on how the micro, small, and medium businesses utilize the loan:

• Seed Capital to start new ventures, making it smooth for entrepreneurs to establish their businesses.
• Fund the purchase or upgrade of essential business assets, such as machinery, equipment, and real estate, which are needed for expansion and growth.
• Loans specifically intended for acquiring or leasing equipment to build up on production capabilities.
• Loans to meet the operational requirements in the day to day business like inventory, salaries, and utilities etc. Thai is called the working capital loan and needs to be met immediately for smooth operations. 

These loans are designed to improve cash flow and facilitate operational efficiency, enabling SMEs to run successfully. They often come with tailored terms and conditions to cater to the unique challenges and needs of different business sectors.

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3. Features of SME Loans

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1. Loan Amount- Every SME business is eligible for a loan amount upto a certain limit which depends upon the classification of the business, i.e., micro, small, and medium enterprises, as defined under the MSME Act 2006.
2. Loan Objective- Lending institutions provide credit facilities on the basis of certain terms for various objectives like setting up the business, hiring manpower, purchase of specific equipment or pieces of machinery, meeting day-to-day expenses, etc. among others.
3. Rate of Interest- The rate of interest charged by the lending institutions is reliant upon factors like the type of loan, credit history and financial health of the business, and lastly the interest rates prescribed by RBI.
4. Duration- The duration of an SME loan can range from as short as twelve months to up to five years depending on the loan category and objective.
5. Repayment Schedule- Unlike other business loans, SME loans can easily be according to the business’s cash flow, allowing businesses to manage their finances smoothly without any stress.
6. Tax Incentives- SME loans could also bring the tax benefits to the borrower, including interest payment deductions, subject to meeting eligibility criteria.
7. Collateral-related Terms- On the basis of the fulfillment of certain eligibility criteria or lender policies, the lenders may or may not offer collateral-free loans.
8. Credit Assessment: Before granting SME loans, lenders evaluate the creditworthiness of the applicant. This assessment includes a review of the borrower's credit history, repayment ability, and the financial health of the enterprise.
9. Government Support: Various SME loans are available to small businesses under the aegis of supportive government schemes and policies, such as Pradhan Mantri Mudra Yojana, Stand Up India, and Start-up India. These schemes offer collateral-free loans and a partly repayment guarantee from the Government. SMEs meeting the eligibility conditions may avail themselves of such a scheme.
10. Payment obligation on Borrower-To ensure the guarantee of repayment,lenders may impose the obligation of paying a predetermined sum towards the business costs of the project.

4. SME Loans Advantages

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Simplified Process of Application 

With access to better technology and e-banking procedures, the lending institutions like banks and NBFCs offer credit facilities to SMEs in India. These facilities include credit supply for business setup, development, maintenance and expansion through online application providing  ease and convenience for SMEs.

Easier Repayments

Lending institutions now have a deeper understanding of the challenges faced by SMEs to maintain and grow their business. As a result they offer flexible terms of repayments and EMI schedules based on the financial condition of the business.

Low Rates & Charges

The rates of interest and related charges have been significantly reduced under the government-backed credit facility schemes for SME loans. For which a wide range of factors such as borrower credentials, business plans, and financial statements of a company are considered, and when approved, only nominal one-time costs are levied.

Business Development and growth

Since SME loans could be availed for a variety of purposes like setting up business units, hiring manpower, upgrading technology, undertaking business promotion, etc. they could enable required business cash flows to expand a business.

Collateral-Free

Generally, traditional financing organizations require collaterals against the amount of loans availed by businesses. Since, likely, micro and small businesses may not have enough assets or equipment to pledge them against loans, thus SME loans offered by lenders do not have the requirement of collaterals, which makes it a convenient option for businesses to receive funding.

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5. How to Apply for SME Loans?

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• Find lending institutions offering credit facilities as per your business requirements and seek a list of requisite documents for the application process;
• Get mandatory documents like proof of business registration, tax returns, business models and plans, estimated costs, etc.
• Fill out the loan application form and submit it with the necessary attachments.
• Once an application is received, it will be verified to find out whether the applicant business is financially sound and viable.
• If the lending institution is satisfied with the genuineness of the application, it will communicate regarding the approval and disburse the loan amount to the SME.

6. SME Loans Documents Required

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• Financial Statements of business;
• Income tax returns for last year;
• Bank statements;
• Business plan;
• Registered business address and identity proof of business owner or proprietor;
• Collateral or guarantee documents (where applicable).

7. Eligibility of SME Loans

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• The age of the primary applicant should be between 25 and 55 years of age.
• The loan applicant must possess knowledge and experience in the concerned area of business (at least three years is preferred);
• Applicants must hold a credit score of 750 or more.
• The applicant should not have an adverse credit history but a strong repayment ability to be eligible.
• The SME business should exist (three years or more) with efficient operations and a stable financial position.
• Availability of collateral/third-party security where lending institutions specifically require the same. Although traditional lending institutions may offer loans upon the availability of collateral, others might not ask for it.
• Key Financial metrics showing business viability such as solvency and profitability ratios should be positive with minimal debt-related business liabilities.
• Any specific eligibility criteria where the SME loan is sought for any particular purpose such as business plans and a viable business model for initial capital, purchasing assets or machinery for a business project, etc.
• Any specific eligibility criteria where the applicant SME wishes to avail the benefits of any particular government schemes or policies, the applicant should fulfill the eligibility criteria under the scheme based on SME size and type.

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8. Conclusion

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Essential rules for SME loans vary among lending institutions. To increase the chances of securing SME loans, applicant businesses need to take care of the specific eligibility criteria. Since the terms and conditions of the lender may differ less or more, it is necessary to refer to the lender-specific criteria before making an application to reduce the chances of rejection. Hence, SME loans in India have helped smaller businesses opt for loans and fulfill their business requirements rather than shutting down their businesses and extending their operations.