What Are The Types Of SME Loans Available In India?

Sme Loans

According to the World Bank report, Small, Medium & Micro-enterprises (SME) make for about 80% of the total global industrial enterprises. They account for approximately 40% of the entire manufacturing output and employ over 117 million people. Looking at the significant contribution of SME to the nation’s economy, much financial assistance is available to SMEs in India.       

The business loan in India generates a large number of jobs to unemployed, give speed to economic activity growth, development, and also encourages innovation. These loans offered to women entrepreneurs on a short-term basis.

In simple language, we can say that SME& MSME loans are one of the most powerful engines in the economy of India. India’s economic development can be increased by encouraging these business sectors.

MSME / SME loans can be used for:

  • Purchase of machinery 
  • Pay expenses
  • Purchase of goods
  • Fulfill capital requirements
  • Buildings construction
  • Improve the firm’s infrastructure
  • Paying bills

Hence, these are the reasons why entrepreneurs need a business loan for establishing their small and large businesses. Theses are the common expenditure for which the funding is required.

Different Types of SME Loans in India:

Many banks and other financial institutes, NBFCs, provide a variety of business loan in India to them. Some are collateral-free; others require some assets as collateral. These loan products have multiple repayment options. Apart from that, different financial institutes have different criteria of interest rate, documentation, tenure, EMI options. Hence, an SME needs to know all the types of loans available and their features. Below are some of the SME loans currently in the offer: 

●       Term Loans

It is a popular form of SME loan in India. Long-term business loans are available for the purchase of land, building, plant, machinery, etc., while short-term loans can fund working capital. The loan cash, interest rate, and tenure of term loans vary from lender to lender. The interest rate can be fixed for the term or can be floating. Repayment is generally through EMI.

●       Cash Credit Facility

Some SME business loans are available against current assets of the enterprise. An entrepreneur can pledge account receivable, unpaid invoices, raw materials, and stock in trade as collateral. The Overdraft facility is also available with some lenders.

●       Bank Guarantee – Stand up India 

A variety of bank guarantees, like advance payment guarantee, deferred payment guarantee, financial guarantee, foreign bank guarantee, and performance guarantee, are available to SMEs. Bank provides a guarantee to its customers based on their past financial transactions and current fund requirements. The SME owners can use a bank guarantee to convince their suppliers or customers of their credibility. 

●       Asset-Based Business Loans

It is sometimes tricky for SMEs to avail an unsecured business loan. Many banks and NBFC offer loans to business owners against their business or personal assets. The amount of loan depends upon the market value of the asset. The interest rate is lower than the unsecured business loans.

●       Bill/Invoice Discounting

This loan product enables entrepreneurs to generate working capital by converting current assets into liquid assets. Several lending institutions in India enable SMEs to avail funds by discounting unpaid invoices, promissory notes, and bills of exchange. This option will help an SME to get working capital without increasing the overall debt burden.

●       Point of Sale Finance

This loan product enables SME owners to get funds or credit based on their monthly sales. Several NBFCs provide this type of finance to entrepreneurs in India. POS-based business loans help SME owners to avail credit based on real-time data, like monthly debit, credit card sales, promoting cashless payment, etc. 

●       Pradhan Mantri MUDRA Yojana (PMMY)

PMMY is a government of India initiative to give credit to SMEs from the non-agricultural sector. PMMY has three distinct schemes – Sishu, Kishore, and Tarun. Shishu offers credit up to Rs 50,000, Kishore has a limit of Rs. 5,00,000 and an entrepreneur can avail a loan of up to Rs 10,00,000 under the Tarun scheme. Every MUDRA loan is collateral-free. The funds can be put into use to acquire assets as well as to fund working capital needs.

Hence we can see that there is a wide range of SME loans is available in India for entrepreneurs. These loans differ from each other in several aspects, such as the loan amount, collateral requirement, eligibility criteria, interest rate, and repayment tenure. But for successful loan approval, you must have to match the business loan eligibility criteria for that. Also, before availing loan borrowers must have an idea that which types of SME loan should he/she opt for according to the need and priority basis.

 The business owner must spend some time to compare the SME loans provided by various lending institutions in India. NBFC has the online loan application facility to make the application and loan disbursement process hassle-free and quick.