SME Loan - Overview, Types and Its Importance

SME refers to Small and Medium Enterprises that contribute 40% of exports from India and employ millions of people there. Besides agriculture, it is one of the most practised occupations among young Indians. Largely putting in the country’s economy, SMEs have a massive deal in making India one of the fastest-developing nations worldwide. However, when it comes to expanding their horizons, most SMEs face financial challenges due to a lack of funds.

The Indian government has launched several schemes to support small businesses. Some provide collateral-free loans to SME owners, while others support them in technology and expansion. Many NBFCs like Hero FinCorp also offer secured and unsecured loans to help SMEs cover regular or expansion-related expenses. Whatever your goals are, below is an overview of what an SME loan is, its types, meaning, benefits, and application process.

Read Also: How to Qualify for SME Loans in Easy Steps?

What is an SME Loan?

As discussed, SME (full form - small & medium enterprises) loans are Business Loans especially designed for SMEs planning to take progressive steps in the industry. If you are an SME owner, these unsecured credit facilities make it easier to support and promote local industries contributing to the country’s overall economic development. Reputed lending institutions like Hero FinCorp offer SME loans of up to Rs 40 Lakh that small entrepreneurs can borrow to expand their businesses or tackle their current financial needs.

Without any usage restrictions, these loans allow usage for any legal purpose: expanding the workplace, hiring staff, investing in marketing, purchasing machinery, upgrading equipment, or building working capital. Usually, a solid business history with satisfactory financial performance is all it takes to get an SME loan without any security, guarantor, or collateral.

Also, Read: What is SME Full Form, Meaning, Types and Benefits

Different Types of SME Loans in India

Now that you know what an SME loan is, let’s look at their types available for borrowing in India:

Term Loan

Term loan is one of India's most popular types of SME loans. We at Hero FinCorp provide SME loans of up to Rs 40 Lakh without any collateral or security. However, the company must be at least five years old and have a decent credit profile. The repayment term can be up to 36 months with fixed monthly EMIs.

Loan for Working Capital

A loan for working capital is the best funding solution to overcome financial shortfalls during the business lifecycle. To ensure smooth operations, it helps cover day-to-day operational needs. Whether you want to deal with the shortages during the off-season or accommodate the high-season demand, a working capital loan with no usage restrictions benefits the most.

SME Loan Secured by Real Estate

As its name implies, it is a secured loan available against a residential or commercial property as security. With a loan-to-value ratio of up to 75%, it comes with a repayment tenure of up to 15 years for easy EMI management. It is an ideal micro-financing solution to fulfil company needs. However, it involves the risk of losing the collateral in case of default.

Cash Credit

Cash credit is available against current assets, including accounts receivable, raw materials, trading stocks, outstanding bills, etc. It is like revolving credit that increases working capital and helps cover various expenses. Some financial institutions also offer overdraft facilities to provide cash credit. SME owners can use these facilities to support their operations.

Also, Read: SME or Small Business Loans

Advantages of Taking an SME Loan

SME owners majorly use SME loans for business expansion purposes. Some also borrow these loans to meet their working capital requirements, enhance cash flow, buy machinery, pay rent or salaries, train staff, invest in marketing, open a new branch, launch a new product line, etc. Let’s look at the primary advantages of taking an SME loan:

• Competitive Interest Rates: The SME loan interest rates are affordable, depending on your business performance, credit profile, and other essential parameters.
• Ample Loan Amount: You can borrow an SME loan of up to Rs 40 Lakh to cover your various expenses without any end-use restrictions.
• Collateral or Security: Since SME loans are unsecured, they do not require any collateral, security, or guarantor.
• Flexible Repayment: You may choose a repayment tenure of up to 60 months with EMIs suitable to your repayment capacity.
• Additional Charges: Since the processing fee, part-payment or foreclosure charges, or late payment penalties are nominal, your financial burden does not increase more during a shortfall.

Read Also: What is SME Full Form, Meaning, Types and Benefits

Fee and Interest Rate of SME Loan

After understanding the SME loan's meaning and benefits, knowing the applicable fees and interest rates is crucial before finalising the borrowing decision. These are the costs involved:

• Processing Charges: You must pay processing charges as a fee to the lender to process your loan application, prepare the documentation and legal agreements, offer online loan service, etc. These fees are nominal and often a non-refundable one-time payment.
• Interest Rates: The interest rate is the cost of borrowing you must pay to the lender in addition to the principal amount. Each EMI contains components of both principal and interest payments. The applicable interest rate largely depends on your business history, financial performance, credit score, debt-to-income (DTI) ratio, etc.

Read Also: SME or Small Business Loans

How to Apply for an SME Loan?

Follow these steps to apply for an SME loan online:

• Go to the Business Loan webpage on the Hero FinCorp website.
• Go to the Hero FinCorp website and click 'Apply now'.
• Fill out an online application form.
• Provide the necessary documents. 
• Enter the loan details like amount and tenure. 
• Keep the reference number provided and give additional information to the lender’s representative.
• After verification, get a loan offer you must accept to receive disbursal.

Also, Read: How to Qualify for SME Loans in Easy Steps

Conclusion

The first step to financing your SME is to understand the SME loan meaning. You may borrow different types of SME loans according to your funding requirements and purpose. Assess your needs and repayment capacity to ensure prompt EMI repayments and prevent financial complexities.

Frequently Asked Questions

1. What comes under an SME loan?

Any self-employed professional or non-professional and entities like sole proprietors, LLPs, trusts, and partnership firms are eligible for an SME loan.

2. What is the maximum loan limit for SMEs?

While the maximum loan limit may vary between lenders, at Hero FinCorp, it is Rs up to 40 Lakh.

3. How do you qualify for SME?

Indian citizens between 25 and 65 can qualify for an SME loan if they have a business experience of at least five years. All self-employed professionals, non-professionals, entities like sole LLPs, partnership firms, trusts, and proprietors are eligible.

4. What is the interest rate of an SME business loan?

The SME Business Loan interest rate depends on your credit history, business type and experience, DTI ratio, repayment capacity, etc.

5. What are the problems with SME lending?

Small size, collateral with smaller value, and limited track record are the major problems with SME lending. Hero FinCorp resolves all these with collateral-free SME loans at easy eligibility conditions.