What is SME Loan and How Can You Benefit from It?

Sep 01, 2020

Small businesses are essential to the economy. As per MSME Ministry's 2019 annual report, there are 6.33 crore MSMEs in India out of which, 3.31 lakh are small businesses and 6.30 crore are micro-units., comprising almost 90% of all businesses globally. Despite this, many small and medium businesses struggle when it comes to funding. To help SMEs meet their funding requirements, many financial institutions offer loans that cater especially to their needs.

What Is SME Loan?

An SME loan is also known as a loan for Small and Medium Enterprises. It is a credit facility offered to medium and small businesses for their long-term, working capital, growth or expansion needs. It can be extremely useful for SMEs to realize their full potential through appropriate funding, especially for women-run businesses which might otherwise find it difficult to get funding.

Why Do You Need an SME Business Loan?

A micro, small or medium enterprise does not have access to the resources that an established business may have. Yet, there may be opportunities for an MSME, also known as a Micro, Small and Medium Enterprises, to grow. For instance, a small grocery store may have seen increased demand during the coronavirus pandemic. However, many customers may have purchased products on credit. To keep the business going, the store would need to stock up. An SME business loan could benefit the store, allowing the owner to purchase inventory without waiting for cashflow.

You may wonder what is MSME loan and how it is different from business loans that banks already offer. An MSME loan or an SME business loan is a credit option specifically for small businesses. An MSME may require funds for a number of purposes, like everyday operations or to expand. A business loan, on the other hand, is typically availed by larger, well-established businesses. This is because they often require heavy documentation and a strong credit history in comparison to an SME business loan. Which is why various types of MSME loans benefit small establishments more because they are small-business friendly.

MSME Loan Benefits

As mentioned above, an SME or MSME business loan has requirements that a small business can meet much more easily than a regular business loan. It is designed specifically to support MSMEs.

Here are some of the MSME loan benefits:

1. Low Documentation Needs

The biggest advantage of MSME loans are their minimal documentation needs. While a regular business loan may demand property deeds, financial statements, list of owners, partners or shareholders, MSME loans do not require them. Basic documents like bank statements, GST details and income tax filings, which are easily accessible, are often the only necessities. Small businesses do not have to run from pillar to post to access these.

2. Collateral-free

SME loans are often unsecured. This means that they do not require collateral. As an MSME owner, you will not have to produce property papers or mortgage business equipment to access funds. Basic proof of business documents will suffice.

3. Affordable

Since SME business loans are created specifically to help small businesses, the interest rates are also in line with their affordability. Interest rates are often crafted specifically with a business’ ability to repay in mind, hence ensuring that the deal is fair.

4. Flexible Tenure

The duration of these loans can also be decided based on the SME’s comfort level. For instance, many SME loans are short-term, with tenures ranging from one month to 36 months. Repayment is also flexible, with banks offering weekly, monthly or bi-monthly installment options.

5. No Prepayment Charges

Most SME business loans also waive prepayment charges for early loan closure. So, if you are able to repay your debt in full before the term ends, you will save on interest payment while paying no extra cost for early closure.

What Are the Different Types of SME Loans?

One shoe cannot fit all. A manufacturing SME may have different funding requirements from a service-based business. This is why there are different types of SME loans with different specifications. From invoice discounting and bank guarantees, to the government-backed Pradhan Mantri MUDRA Yojana and even secured loan options like asset-backed loans such as gold loans, a wide variety of options exist. As an SME, you can choose one that fits your needs best.

Drawbacks of SME loans

There are some drawbacks to SME loans. While there is flexibility in terms of collateral and repayment, choosing an unsecured loan vs a secured loan often means higher interest rates. A default on repayment can also attract penalties. This is why you need to evaluate your financial standing before going in for an SME business loan.

An Alternative to SME Loans

A gold loan can serve as a reliable alternative to SME loans. If you are just starting a business, you may not have even the minimum documents that an SME loan requires. Gold loans can be availed by anyone with gold assets. They also offer flexible tenure, bare minimum documents with only KYC required, and affordable and gold loan schemes. The loan-to-value amount is also typically higher, which can easily be checked with a gold loan calculator.

Rupeek provides instant gold loans to small companies to meet their business needs. Unlike SME business loans, gold loans can be availed even by those who have absolutely no business documents. Only KYC details and the right gold amount are needed, which can be collected online, or at your doorstep as you remain in the comfort of your home. Rupeek’s MSME gold loans offer convenience and comfort to make borrowing simple and affordable.