Different types of SME loans and What You Should Opt For

May 15, 2020

Small businesses need funds for various reasons and at short notice. Loans for micro, small and medium enterprises (MSMEs) are designed specifically to meet the dynamic needs of such borrowers. In India, different banks and non-banking financial institutions provide different types of SME loans to borrowers. 

An MSME is a business with an investment of up to Rs.20 crores and turnover, or total sales in a particular period, of under Rs.100 crores. This is as per the government’s official definition, and in order to qualify for an MSME business loan, businesses must meet this requirement.

The different types of SME loans can be used for expansion purposes, purchasing or replacing plant and machinery, inventory management, or even for working capital needs. 

Types of SME Loans Available 

To give entrepreneurs the power of choice, India offers different types of SME loans. Some types of loans are issued only when backed by an asset while others do not require such security. The variety of MSME business loans available in the market ensures that there is a viable option available for every business owner and no one gets left behind due to lack of access to finance. 

Secured Loans

Secured loans provide funds in exchange for an asset pledged as security. The asset acts as a safety blanket in case the borrower defaults on repayments. Since the lender has a way to recover funds, the MSME loan interest rate on secured loans is relatively low. 

  1. Term Loans

One of the most popular types of SME loans are term loans. These secured loans provide finance against assets such as plant or machinery, property and vehicles. Loans are provided for a fixed period of time, at a predetermined MSME loan interest rate and have to be repaid at frequent intervals.  

  1. Asset-based Loans

Small business owners who may not have business assets to make the cut for term MSME loan eligibility can pledge their personal assets to get an instant loan. Residential property, shares, or gold can be used as a security to get an asset-based business loan.

  1. Cash Credit Facility 

Sometimes, small businesses may need an MSME business loan for the short term. Instead of pledging long-term assets as collateral, businesses can pledge short-term or current assets like raw materials, unpaid invoices or short-term securities to secure cash credit facilities. A cash credit facility is usually issued for 12 months and can be used to meet day-to-day expenses or working capital needs. 

  1. Gold Loans

MSME owners can also avail gold loans against gold assets. Gold loans are one of the best options for an MSME business, as most often, these companies require a significant amount of capital which can easily be met with the high per gram rates offered. A gold loan calculator can help business leaders quickly calculate the amount of gold they will require for the loan amount that is needed.

Many institutions like banks and NBFCs offer gold loans at affordable interest rates and flexible durations that can meet specific business requirements. Gold loans have varied durations and can be secured against gold assets like ornaments, which are commonly found in most Indian households. 

Gold loans also protect borrowers from the risks presented by offering other forms of capital as collateral. Many gold loan companies also offer overdraft facilities that make loans easier and hassle-free for businesses. An overdraft facility allows businesses to pledge their gold once to avail the exact amount of capital required and pay interest only on the amount utilized.

Unsecured Loans

For entrepreneurs who do not have assets for a secured MSME business loan, unsecured loans are a feasible option. Since these loans do not require an asset as security, they usually carry a higher interest rate to compensate for the risk of default. 

  1. Bank Guarantee 

Sometimes, a bank or financial institution can offer surety that they will honour a business’ payment obligation if they fail to do so themselves. It is usually a financial guarantee provided by a bank to a business customer based on the business client’s past financial record. Banks charge a fee to provide a guarantee for repayment.  

  1. Invoice Discounting

Many lending institutions in India permit SME owners to pledge their bills, unpaid invoices or promissory notes to get funding. A percentage of the principal is recovered as interest but the business gets quick funds for working capital or short-term financial needs.  

  1. Pradhan Mantri MUDRA Yojana

PMMY or simply MUDRA loans are government-funded MSME business loans that are tailor-made to meet the needs of small businesses. They are unsecured loans, needing no asset backing and can be used for a new business launch or for expansion. MUDRA loans are sanctioned under three schemes: Sishu, Kishore and Tarun with loan amounts of Rs.50,000, Rs.5,00,000 and Rs.10,00,000 respectively.  

  1. Point of Sale Finance

POS finance is a new-age credit facility. Banks provide POS loans to owners based on the number of credit and debit card swipes they have per month. MSME owners can avail this form of credit by simply promoting cashless payments. POS financing is usually a short-term borrowing option with easy repayment options. 

Gold loans for SMEs

Rupeek provides quick gold loans to small businesses to meet their business financing needs. Unlike other products with complicated MSME loan eligibility needs and processes, Rupeek’s gold loans only require KYC details and gold assets that will be collected at your doorstep. Rupeek’s MSME gold loans are quick, easy and affordable, and are made even more convenient with Rupeek Quick, a gold loan overdraft product that aims to nurture businesses everywhere.