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06 Apr
  • Editorial Team
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Small and Medium Enterprises are flourishing across the world right now, and their prospects in growing economies like India are very promising. However, they continue to face one major problem, and that is lack of capital. This is where SME Funding or SME Finance comes into picture.

SME Funding is important as it takes care of the capital requirements of an SME business. It also saves you from having to share your control/ equity in exchange for money, thus keeping your profits undivided. The process to get SME Loans is quick and easy, and there are many loan types to choose from. To get the most out of SME Financing it is critical to know your loan requirements, which has been explained below:

Knowing Your Loan Requirements

  1. Loan Amount: The first thing you need to assess before applying for a loan is the loan amount required. The old-age adage "the more, the better" doesn't apply here. The excess loan amount will only lead to excess interest amount, while a lower amount will fall short to accomplish what you have in mind. You must perform a thorough analysis of the funds needed before you decide on the final loan amount.

  2. Purpose: There are two primary purposes behind seeking SME Loans: to provide for working capital or to fund long-term requirements. You can choose one or both, but you must decide before you apply for the loan.

  3. Repayment Tenure: Another important parameter to be decided is the repayment tenure. A shorter tenure might put an extra burden on you to repay the loan. A longer tenure is safer but will result in higher interest amounts.

  4. Current Financial Status: Your current financial status is an important yet often overlooked factor. Often companies on the verge of bankruptcy or facing severe non-profitability take hefty loans to get the necessary working capital, but fail to repay them and are doomed.

  5. Collateral Type: Since most SME Loans are secured and require collateral, you need to assess the collaterals you have at your disposal. Try to select the assets whose seizure (in the case you are unable to repay the loan) would not severely impact your business operations.

Popular SME Loans

  1. Secured Term Loan: A term loan is the most common and simplest type of loan, where you receive the total loan amount in the beginning itself. Secured term loans require some kind of collateral as a guarantee.

  2. Secured Working Capital: If the purpose of your loan is to fund the everyday operations of your business, then working capital loans work the best for you. Again, they are "secured", implying that some assets are required as a guarantee for loan repayment.

  3. Revolving Working Capital: If you are taking the loan to fund the working capital of your business but are not sure about the loan amount or the repayment period, then revolving working capital loans sound appealing. You can decide the repayment tenure and even apply to reborrow the loan amount. Though harder to get compared to other loans, it provides SMEs with enough loan flexibility.

  4. Purchase Invoice Finance: Purchase Invoice Finance is a rather straightforward way of getting funds. Simply put, the lender gives you the funds to purchase order from the suppliers in return of purchase invoice. Instead of getting the lump sum amount (like you do in working capital loans), the amount here is meant specifically for buying receivables from the suppliers.

  5. Sales Bill/Invoice Discounting: Invoice discounting is a quick way to gather funds on the basis of the outstanding sales invoices. A portion of that amount is provided by the lender, usually along with a small fee. No collateral is required and the invoices are the only guarantee the lender needs. The best part about this option is the speed, as the amount is disbursed within few hours.

  6. Machinery Term Loan: If you want to invest in fixed assets, particularly in machinery and equipment, then Machinery Term Loans are your savior. The tenure of the loan is flexible and can often be as long as 7 years.

  7. Supply Chain Finance: A different but growing popular type of loan, supply chain finance looks at the supplier's end instead of the customer's. In simple words, the lender does not pay the loan to the borrower (that is, your company) but directly to the supplier. The benefit of such arrangement is that the lender has the transparency of where his/her money is being utilized, and the credibility of both the company and the suppliers come into play.

Eligibility and Documentation

The eligibility for SME loans is far easier than conventional corporate loans. You only need to fulfil the following:

  • Must either be a private/public sector company or a proprietorship. Self-employed businesses can apply too.

  • At least 3 years in the current business.

  • Business must have profits as per the industry norms.

  • The credit score must be clear and satisfactory.

To apply, following documents are required:

  • The financial statements (audited) for the last 3 years, along with financial projections.

  • KYC documents for all the directors and partners of the company.

  • Registration certificates of the company, along with constitution documents.

Finding funds at the right time is critical for the success of any business, and SME Loans make that possible for you. There are multiple options to match the type of funding needs you might have, but the end goal is the same: ensuring that you have sufficient capital to run your business smoothly.

Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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