Money makes the world go round, and nowhere is that truer than in the world of business. To run a successful business, all entrepreneurs require capital, which can come from different avenues – venture capital, loans, or family and friends.
SME and Business loans offer a good way to finance small and medium enterprises (SME). If you’re looking to fund your small business but aren’t sure which route to take, read on to find out what makes sense at this stage.
In this article, we will breakdown the differences between a business loan and SME loan, and what that means for your business.
What Are Business Loans?
Business loans are typically issued to established businesses for financing various needs, such as launching new products, expanding the business, buying equipment, warehousing needs, renting more property, hiring new employees, and so on. Short-term business loans are, as the name suggests, good for financing short-term needs. In fact, they’re also useful in establishing a good credit history, which can help you with future loans.
What Are SME Loans?
SME loans are meant to help small and medium businesses expand or finance daily operations. SME loans can also be used for buying equipment and inventory and increasing working capital. The loan amount can also be used for hiring fresh talent, marketing purposes, legal services and so on.
Business loans require documentation, such as financial statements, shareholders lists, directors and partners list, income tax returns, deeds of any property owned by the business, quotations et cetera.
However, banks are aware that most small businesses are not always able to present so many documents, and hence SME loans require minimum documentation, which is typically GST documentation, income tax returns, KYC documents and bank statements related to the business. Having said that, there is a high chance that your SME loan application may be rejected. Banks are more likely to grants SME loans to a business with a minimum operation of 3 years, audited financials showing a turnover of ?4 lakhs, and with all documents in order.
Credit History and Collateral
Most banks issue a business loan only to businesses with a good credit history and track record, which makes it difficult for small companies to avail this loan. However, SME loans do not require the submission of credit history. Moreover, entrepreneurs applying for an SME loan do not have to submit collateral either, which gives their burgeoning business some security.
Business loan interest rates are quite high, ranging from 12-24%. SME loan interest rates are comparatively much lower i.e. typically between 0.55-3%.
Time Required for Disbursement
Applying for a business loan involves various documentation formalities that the bank goes through with a fine-tooth comb. It may also involve many personal visits to display your reliability and good character. However, very less time is required to avail an SME loan – in fact, the Government of India has mandated that all SME loans must be approved and transferred to the entrepreneur within two days of approval.
The amount of money granted in a business loan is typically upwards of ?20 lakh and can go to many crores. SME loans, on the other hand, normally range from ?1-20 lakh.
SME loans offer a viable funding route for budding businesses that. However, once a business grows to a certain size, it needs the higher capital offered by business loans. So, when your small business has taken off and started flourishing, it is more advantageous for you to aim high and apply for business loans from reputed financial institutions such as Tata Capital.