Table of Contents
- What is an SME loan?
- Who can apply?
- How to get the most out of your SME loan?
- Comparison of costs
- Go for secured SME loan
- Maintain your CIBIL Score
- Have adequate documentation
- Purpose
- Working capital requirements
- Business expansion
- Leverage your position
- Debt consolidation
- Features of SME loans
- Affordable interest rates
- Easy eligibility
- Tax deduction
- No collateral
- Bottom line
Also known as Small and Medium Enterprises loans, SME loans have been effective for various small and medium business owners looking for funding their business expenditures. Businesses may face a shortage of funds at any time, and it's necessary to inject the required capital to maintain business continuity. However, most business people wonder how they can get more results out of their SME loans?
What is an SME loan?
SME loans are affordable business loans extended by banks and financial institutions to meet the financial requirements of small and medium scale businesses. SME loans can be secured where the applicant furnishes personal assets as collateral security, or unsecured where no collateral is required. There might be a slight increase in the rate of interest in unsecured SME loans owing to the increased risks that banks face.
Who can apply?
SME loans are targeted towards the upliftment of small and medium businesses. As per Section 7 of the Small and Medium Enterprises Development Act, 2006, the following are classified as SME enterprises:
| Investment | Turnover | |
|---|---|---|
| Small Enterprises | Rs. 1 crore to Rs. 10 crore | Rs. 5 crore to Rs. 50 crore |
| Medium Enterprise | Rs. 1 crore to Rs. 20 crore | Rs. 50 crore to Rs. 100 crore |
How to get the most out of your SME loan?
To get the most benefit out of your MSME loan, ensure the following:
- Comparison of costs:Entering into a formal lending arrangement involves costs, such as processing fees, administrative costs, and interest costs. While looking for an SME loan, it is beneficial to compare costs charged by various lenders and select the best one. However, it is equally important to consider other parameters like terms, flexibility, and eligibility criteria, as the applicant's profile plays an important role in determining the charges.
- Go for secured SME loan:Secured loans usually have lower interest rates as compared to unsecured counterparts as banks pose a lower risk and have security in case of a default.
- Maintain your CIBIL Score:CIBIL score is an important criterion for banks. It shows your credit history and performance. In case you have a lower CIBIL score, then the chances of getting your loan sanctioned get reduced, even if you have applied for secured loans. In the case of unsecured loans, as banks do not have collateral security, CIBIL score becomes paramount to decide on the sanction or rejection thereof.
- Have adequate documentation:Each bank has its own documentation requirements. Furnishing all the required documents helps you get your loan at a lower interest rate.
- Purpose: Applicants prefer an SME loan primarily for two purposes:
- Working capital requirements:Working capital is the necessary fund to conduct your daily and routine operations. This includes salaries, wages, materials, rent, and more. The gap in the working capital cycle is usually filled by working capital loans to ensure the smooth conduct of business.
- Business expansion:Expanding your business requires a lot of capital. Whether it involves starting a new factory, godown, or office, or purchasing additional equipment or plant and machinery, or adding a new product line, a huge chunk of capital needs to be invested. Opting for affordable loans is better than burdening your business with sudden cash outflows.
- Leverage your position:Debt leverages the position of your business. While raising equity involves the distribution of profits, SME loans create a fixed charge against your profits in the form of interest payments. Such interest payments are also eligible for tax deductions. Thus, raising debt is cheaper than equity for any business.
- Debt consolidation:Your SME loan can be a great tool to consolidate your other debts. This also includes other unsecured lending arrangements that you might have entered to meet your business funding needs. Such unsecured loans from moneylenders or other unorganised sectors may involve high interest charges. Paying them off using an SME loan can reduce your interest cost.
Features of SME loans
Following are the features of SME loans:
- Affordable interest rates: SME loans are some of the most affordable loans to boost your business. While the interest rates depend upon the profile of the applicant, SME loan interest rates start at just 14-15% per annum.
- Easy eligibility:SME loans have easy-to-fulfill eligibility criteria. This includes
- Age:The applicant should be aged between 23 and 65 years
- Turnover: In the case of professionals and self-employed individuals, the annual turnover should be above Rs. 10 lakh, whereas in the case of a sole proprietorship, partnerships, private limited and limited companies, the minimum turnover requirement is Rs. 20 lakh.
- Experience: The applicant should be in the business for at least three years.
- Tax deduction:As the loans are taken for the purpose of business, the interest paid on such loans is accounted as business expenditure. Thus, they are allowed as a deduction from the profits of your business under the Income Tax Act, 1961.
- No collateral:In the case of unsecured SME loans, the lender requires no collateral security. Thus, you are relieved from the stress of getting your assets attached in case of any uncertainties.
Bottom line
SME loans are a great tool to meet the financial needs of your business. They are specially structured to cater to the needs of small and medium business owners. Shriram Finance SME loan, giving due consideration to your needs, provides loans at some of the most affordable rates and easy-to-fulfill eligibility criteria.
To make the loan application process smooth and convenient, MSME loan online application facility is also available. Shriram Finance online SME loan ensures that the entire loan process is completed in an efficient and timely manner. Apply for an MSME loan without collateral in 2022 from the comfort of your home!
