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25 Jul

Sme Or Small Business Loans

  • By Editorial Team
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In India as well as other developing nations, SMEs are one of the main drivers of job creation, social stability and economic growth. Making up almost 8 per cent of India's GDP, these businesses often need funds to fuel expansion, buy much-needed machinery or cover operational costs. In such cases, small business loans are the best way to go forward. With flexible financing solutions, minimal documentation and accommodative loan approval process, it's no wonder then, that why small business loans are much in demand.

Today, you can easily make your dreams come true with the help of Small Business or SME loans, which guarantee a secure transaction, without any hassles and worries. So let's understand what an SME or Small Business Loan actually is and what all does it entails.

Introduction to Commercial Loans or Corporate Lending

A commercial loan is a short term loan provided to businesses by an NBFC, financial institution or bank. These loans are typically used to fund capital expenditures and/or cover operational costs that the company may otherwise be unable to manage.

Commercial loans can even be taken for basic operational needs like funding the payroll or other day to day requirements. Just like any other loan, commercial loans also require assuring the lender that the borrower is capable of repaying the borrowed money. For this, the borrower has to submit valid documents showing that their business has a consistent cash flow.

Commercial loans are short-term and are meant to assist business firms when they find it difficult to afford short term funding requirements. Although commercial loans are known to be short-term, some NBFCs & Financial Institution present renewable commercial loans which make it possible for firms to renew the loan after repaying the initial borrowed amount.

The rate of interest on these loans depends mainly upon the financial status of the company (borrower), market dynamics, and past repayment history. The lender usually prepares a repayment plan which operates in sync with the borrowers cash flows, so as to ensure effective loan servicing.

Features of SME or Small Business Loans

Depending on the capital required, different types of loan can be availed, the main features of a small business or SME Loan are:

  1. Multiple loan programs : Multiple loans programs are available to suit varying finance requirements of businesses, which can be used to fund expansion plans, operating expenses, and more.

  2. Attractive interest rates : Business loan interest rates are based on a variety of factors such as credentials of the borrower, the cost of funds, loan tenure and market dynamics. Interest rates offered to small businesses are affordable and as per market standards.

  3. Flexible Repayment Plans : Flexible payment plans allow you to customize your loan repayment according to your convenience. Mostly, the person availing the loan gets to choose a repayment plan according to his/her cash flow cycle.

  4. Hassle-free loan disbursement : These loans are approved within a few days of submitting the application and required documents.

  5. No application fees : Application fee is sometimes waived for borrowers.

Types of SME or Small Business Loans

  1. Bill Discounting / Invoice Discounting / Purchase Invoice Finance

Bill Discounting refers to the discount/fee which a bank avails from the borrower in order to release funds before the period of credit ends. This bill is then presented to the borrowers buyer and the full amount is colletced by the lender.

  1. Working Capital Term Loans

A working capital loan is a loan availed with the sole purpose of financing the daily operations of an organization or company. These are not used to buy long-term investments or assets and are instead used to cover wages, accounts payable, etc.

  1. Working Capital Demand Loans

A working capital demand loan is the same as a business line of credit. It allows a business to use the flexible financing for use in their everyday business when needed.

  1. Secured Term Loan

This is a type of loan in which the lender pledges some asset (such as house property or machinery), as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan.

  1. Project and Acquisition Finance

In this type of financing, real estate projects based on the cash flow of projects are considered. Acquisition Finance transactions comprise of a tailored debt package for capital investment financing and revolving working capital.

  1. Medical Equipment Financing

Medical equipment financing offers customized healthcare finance to doctors, diagnostic centers, nursing homes and more to meet their funding needs. It could be for purchase of medical equipment or refinancing (balance-transfer) an existing financing arrangement, or for expanding/ renovating an existing health care facility.

  1. Machinery Loan

These loans are offered to purchase new or refurbished plant and machinery for usage by manufacturing units, these loans help in capacity expansion to cater to increasing demand.

Summary and Conclusion

Overall, Small Business Loans or SME Loans are beneficial in expanding a business enterprise, buying new/ refurbished plant & machinery, etc. The loan terms depend on the borrower's profile and past repayment history. So when are you going to apply for a Small Business Loan or SME Loan to achieve your professional dreams and aspirations?

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Did You Know

Rate of Interest (ROI)

Rate of Interest or ROI is that percentage of the principal amount which is charged by a lender when a debtor borrows money. ROI is usually calculated on a yearly basis, and is called APR or Annual Percentage Rate.

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