10 things to know about loans for SMEs

Awareness and prudence is essential while applying for SME Loans

The pandemic has wreaked havoc on the national economy, especially Small and Medium Enterprises (SMEs). In-depth knowledge of various types of SME loans and policies can go a long way in helping SMEs revive their businesses in such a scenario. This blog sheds light on such loans to help SMEs plan their operations accordingly. 

Small and medium enterprises play an essential role in keeping the cogwheels of the national economy running. However, the business challenges posed by the pandemic have thrown many businesses off balance. To mitigate such concerns and alleviate their economic distress, the Government Of India has launched several supportive schemes and policy measures. One of their most significant highlights is the friendly interest rates that businesses can avail of by registering for SME loans. 

Let us have a look at the 10 things to know about SME business loans:

Gain a clarity

It is important to note that the loan you avail of is a financial obligation that needs to be fulfilled with complete focus. Therefore, ask yourself these critical questions while applying for a business loan. 

A. How much loan do I need? What if it is more than what I actually require?

B. Have I charted out an allocation plan for funds and about repayment of the same?

C. Where exactly am I going to utilize the funds?

Realistic business projections 

Set reasonable business goals and an actionable plan to implement the same to ensure long-term profitability. This requires realistic business projections. Often many entrepreneurs think that collateral is the only risk-mitigation needed when it is not so. Realistic business projections play an important role in timely loan sanction. Moreover, they ensure hassle-free operations, efficient risk mitigation, and the desired growth trajectory, leading to adequate business cash flow. 

Eligibility criteria for a business loan

The criteria for business loans include:

A. At least 1 year of business operations, minimum Rs. 12 lakh business turnover for the existing enterprise (varies from bank to bank), good repayment history, and financial stability.

B. Individuals, SMEs, MSMEs, business owners, women entrepreneurs, self-employed professionals, and people falling under SC/ST/OBC category are eligible for these loans.

C. Private or Public Limited Companies, Sole Proprietorship, Partnership Firm, and Limited Liability Partnership engaged only in trading, services, and manufacturing sectors are also eligible.

Requisite Documents 

Some of the crucial documents you need include:

A. Duly filled Application form with passport-sized photographs

B. KYC documents of applicant and co-applicants that include Passport, Aadhar card, Voter's ID card, Driving License, PAN Card, and Utility Bills (Telephone, Electricity)

C. Income Proof

D. Business Address Proof

E. Last 6 months' bank statement along with bank details

F. Business Establishment Certificate

G. Proof of belonging to SC/ST or OBC category, if applicable

H. Any other document required by the bank/NBF

Inclusivity

The best thing about the monetary support scheme for SMEs is the affordable interest rates. What's more, it is available for backward and lesser privileged sections of society, for instance, tribals, minorities, women, etc. Moreover, it provides an enhanced focus on women empowerment, giving affordable loan schemes for women entrepreneurs. All of the above provisions are a positive step towards making the nation self-reliant.   

Best business loan interest rate without Collateral/Security

A. Loans provisioned by the Government for small and medium businesses are unsecured business loans, also known as Collateral-free loans. In such cases, borrowers are not required to submit any collateral/security with the bank/NBFC or financial institution. Here're some of their benefits

B. Collateral-free MSME loans are offered at competitive interest rates with flexible repayment options

C. Loan amounts up to Rs. 1 crore can be sanctioned

D. The applicant's profile & credit score, creditworthiness, repayment capability, and financial stability are the crucial criteria considered

E. Collateral-free loans are usually short-term loans that can be repaid within a tenure of 12 months

F. Higher loan amounts can be repaid up to 5 years

I. Financial institutions, such as Private and Public Sector Banks, Non-Banking Financial Companies (NBFCs), Regional Rural Banks (RRBs), Small Finance Banks (SFBs), and Micro Finance Institutions (MFIs), offer collateral-free MSME loans

Purpose of Business Loans for SMEs 

It is equally important to note the purpose solved by SME loans. This will help you get a clearer picture of allocating portions of working capital to fulfill your business requirements and resolve challenges. 

SME loans help you:

A. To meet working capital requirements

B. For new and existing business expansion

C. To manage business cash flow

D. To buy or install new equipment or machinery

E. For the purchase of raw materials, vehicles, tools, etc

F. To stock up inventory

I. To pay off rent, salaries, hire staff, train staff, and much more

Compare your loan options

Before applying for a loan, ensure that you have the most feasible option at hand. Your loan scheme must give you maximum convenience and financial support. It includes the funds offered, additional fees, term length, collateral required, reporting restrictions, and any special rules about paying off the debt.

Nurture long-term relationship 

Many lenders help with working capital solutions, but what you need is a support system having the patience to work with you during turbulent times. In addition, a long-term relationship can be invaluable, starting from providing you with access to a range of financial services and unseen benefits, cutting down your wait time for a loan to as little as a couple of weeks and repayment extension, and more. 

Keep your ears to the ground 

Several loan variants are offered by financial institutions to suit the growing needs of the MSME sector. Businesses can 'step up' and 'step down' EMI option, overdraft facility and more. Being aware of the recent developments, provisions and solutions for loan availability will help you get loans at competitive rates and enjoy maximum benefits. 

It is vital to stay prudent as well as responsible while applying for an SME loan. Such financial assistance can help meet the financial needs of businesses. 

This can help them move up the growth curve while driving long-term business stability.