The SME (small and medium enterprise) sector is the backbone of the Indian economy, employing 106 million people or 40% of the total workforce. If you happen to own or head one of the 42.5 million SMEs operating in India, you would be well aware of how tough it can be to find an SME loan.
There are several loan products offered by banks, NBFCs (Non-Banking Financial Companies) and the government that can help address this need.
Let us take a look at what is on offer in terms of SME and MSME (micro, small and medium enterprise) loans in India.
Related: Top 7 government business loan schemes for small ventures
1. Cash credit facility
SMEs can avail of a cash credit facility from several lending institutions based on their current assets. These can be in the shape of:
- Stock in trade
- Money owed against invoices
- Raw materials
This cash credit facility is extended by way of an overdraft, which is calculated based on the value of the assets pledged by the borrower.
The value of the overdraft itself will remain constant over some time and can be used to fund short-term working capital needs. The cash credit facility acts as a revolving credit mechanism. Check with your local bank to see if they offer this service.
Related: What you need to know about working capital loans
2. Term loans
Term loans are a popular way for small business owners to get both long-term and short-term SME loans.
Long term loans are usually used to buy fixed assets like:
- Land
- Buildings
- Machinery
Short term SME loans, on the other hand, are used to fund the working capital requirements of a business. This is the money needed to cover the business’ expenses for the next year.
The amount of loan, the rate of interest and the duration of repayment may vary from lender to lender.
The rate of interest, for instance, could be a fixed one or a floating one. The mode of repayment is through EMIs (Equated Monthly Installments) for all lending institutions. Several new-age lending institutions use technology to disburse term loans in as little as 48 hours.
3. Bank guarantee
SMEs can apply for various types of bank guarantees tailored based on their past financial transactions. The bank guarantees might be in the shape of an:
- Advance payment guarantee
- Performance guarantee
- Deferred payment guarantee
- Foreign bank guarantee
These bank guarantees are issued on the payment of the specified fees. In certain cases the bank may require the SME to pledge certain current assets or equity as collateral to get the bank guarantee.
A bank guarantee can also be used to convince the suppliers and customers of your business that you’re able to honor your commitments.
4. Pradhan Mantri MUDRA Yojna (PMMY)
This Government of India initiative makes credit available to SMEs in the non-agricultural sector. Small and micro businesses can avail of unsecured and collateral-free credit under the Sishu, Kishore and Tarun schemes.
- Sishu allows an SME entrepreneur to avail of credit up to the extent of Rs.50000
- Kishore makes amounts up to Rs. 500000 available to qualified borrowers
- Tarun is for SMBs seeking up to Rs. 1000000
Another very important feature of this initiative is the fact that the loans obtained under its three schemes can be used both to:
- Start new businesses and
- Fund existing working capital needs
If you are looking at obtaining an MSME loan for a new business, PMMY might be the perfect solution for you. The easy and hassle-free terms of borrowing offered by this initiative are its greatest plus point.
Related: How to find and obtain venture capital financing
5. Business loan against assets
When it is not possible for SMEs to obtain unsecured or collateral-free credit, SME business owners can use their personal and business assets to raise funds.
The size of a loan obtained against business assets is determined by their current market value.
One major advantage of this kind of SME loan is that the rate of interest charged is lower than in the case of unsecured business loans.
6. Invoice discounting
Quite distinct from other forms of commercial borrowing, invoice discounting allows small businesses to raise money for working capital by leveraging their current assets for cash. Some lending institutions enable borrowers to do this by discounting their bills of exchange, unpaid invoices and promissory note before their due dates.
The borrowers can obtain the funds they need to keep their businesses running by parting with a certain percentage of the money realizable against their current assets. That is a way to get quick funding without having to take on any additional debt.
Loan requirements everyone must meet
As with any other form of commercial borrowing, anyone seeking a small business loan is required to fulfil certain conditions to qualify for the loan. These typically include:
- The person applying for the loan should be an Indian citizen
- He or she should be self-employed with a minimum of three years of experience in running a business
- The person applying for the loan should be at least 21 years old
- The business in question should be a profitable one, as shown in the balance sheet
To prove the last item, you’ll need to provide the business turnover and income tax returns for your business (last two to three financial years).
Find an SME loan for your business
Micro, small and medium businesses are a vital part of the Indian economy. As such there are several loan products tailored to the needs of these ventures. These include:
- Cash credit facility
- Term loans
- Bank guarantees
- The PMMY initiative of the government of India
- Business loans against assets
Choose the loan product that offers the terms best suited for your business, then start by asking your local bank if they offer it. Be sure to check out the government’s Pradhan Mantri MUDRA Yojna scheme if your business is not in agriculture. Best of luck to you in your future success!
The information contained in this blog post is provided for informational purposes only, and should not be construed as an endorsement or advice from GoDaddy on any subject matter.
