Want to know about the various types of SME (Small and Medium Enterprise) loans? Then this article for you!
There are seven types of SME loans as found in India. Here they are:
- Term loans: These are the most popular and mature forms of SME loans. Many lending institutions offer customers long-term business loans for buying fixed assets such as buildings, land, machines, plants and more. At the same time, the entrepreneurs also get the option to fund their working capital requirements with short term loans. The interest rate, amount and tenure of these loans differ among lenders. Some charge a floating interest rate while others charge a fixed interest rate. In any case, the borrowers need to pay back in EMIs. Term loans are disbursed fast within 48 hours.
- Cash credit: Many banks and NBCs provide cash credit facilities to small and medium borrowers against collateral-fixed assets. Business owners can get this facility by pledging collaterals like stock in trade, raw materials, account receivables, unpaid invoices, etc. The lenders shall then provide the credit as overdraft. This overdraft amount varies according to the value of current assets pledged by the borrower. The overdraft amount does not change over time.
- Bank guarantee: There are several types of bank guarantees that entrepreneurs can avail. These range from financial guarantees, deferred payment guarantee, advance payment guarantee, foreign bank guarantee, and performance guarantee.
The lenders provide this to their existing customers only, based on their requirements and on their past transactions. Sometimes, there are charges involved as well. Borrowers can use this facility to convince customers and suppliers that their obligations according to contract shall be accordingly met. - Asset-based business loans: SMEs in India often find it hard to get collateral-free and unsecured loans on time, However, because of this, many lenders offer credit to entrepreneurs and business owners against their business and personal assets. The amount of such loans varies according to the market value of assets pledged. In this loan, the borrower has to pay a lower interest rate when compared to an unsecured loan. Assets to be used as collateral can be shares, property, gold, and business assets.
- Invoice/bill discounting: These enable a business owner or entrepreneur to get working capital by converting his current assets to liquid assets. There are several institutions that let business owners get loans by discounting promissory notes, bills of exchange, or unpaid invoices before the due date. However, the borrower sacrifices a certain percentage as a discount from the principal amount. This option is easier and faster than the rest, yet produces little to no debt burden.
- Point of Sale finance: It is a new-age loan product. It helps entrepreneurs to get credit based on their monthly sales, as routed through EDC terminals. Right now, a small number of NBFCs offer this facility to entrepreneurs in the country by using financial technology. These loans, unlike conventional ones, help business owners to get credit based on real-time data. This means monthly debit and credit card sales. One can even get additional loans or credit by the promotion of cashless payment.
- Pradhan Mantri MUDRA Yojana: As you can see, this is a scheme from the government of India. It makes credit available to those SMEs who are from the non-agriculture sector. There are three schemes; Kishore, Sishu and Tarun. One can get a loan of Rs. 50000 under Sishu, Rs. 5, 00,000 under Kishore, and Rs. 10, 00,000 under Tarun. All of these loans are collateral-free and unsecured.
Taken as a whole, business owners and entrepreneurs have a range of SME loans in the country. Many of these are technology-driven and modern. However, it should also be remembered that SME loan products are different from each other when you see the interest rate, loan amount, tenure, collateral, eligibility criteria, etc. Thus, it is better to spend time to compare the SME loans provided by the various lenders.
