Loans may just be a sum of money that needs to be repaid with applicable interest, but not all loans are the same. When Shonit wanted to start-up, he searched for an SME loan. It was his father Amit who explained the difference between the two loan types. Lack of awareness about the intricacies of different types of loans can cause confusion. Let us understand the differences between SME loan and start-up loan so that you can apply for small business loans online with total confidence.

Unique SMEs, unique needs

Loans for SME or Small and Medium-sized Enterprises are usually in the Rs 1 lakh to Rs 50 lakh range. Tata Capital gives these loans for those who want to start a new micro business or strengthen existing business. Basically, any entrepreneur intending to start a small or medium enterprise or who already runs a small or medium business, like a hospital, nursing home or a small scale manufacturer, is eligible for SME loans.

Eligibility conditions include the borrower to be between 25-65 years of age, have a profitable business for three previous years, have a record of filing taxes, and the business is stable & growing. The loan tenure is usually between 12 and 36 months. Some lenders can allow tenure to run up to 48 months.

The SME loan interest rate usually ranges from 18% to 24%. The actual rate depends on the financial and business profile of the SME or MSME.

Special incentives and offers are given. For instance, Tata Capital provides loans to any low-income generation businesses run by women within the parameters of the loan eligibility criteria. In any SME or MSME loan, the repayment is in equated monthly installments.

New ideas, new start-ups

Just like SMEs or MSMEs get business loans, financial institutions provide financial assistance for companies at the earliest stage of the business lifecycle. Startup companies can avail a host of term loan or working capital or asset-backed loans based on their requirements.

To be eligible for start-up loans, traditional lenders say that the unit must be eligible and certified as a ‘Start-up’ by the concerned government authority as per Start-up India scheme. Such loans, given for up to Rs 5 crore, are given to finance for innovation, development, deployment of a new product, processes or services etc. In many cases, such start-up loans – be it working capital or term loan – requires 20% margin. While collateral is not mandatory, banks can ask for a personal guarantee of promoter directors, partners if any. Lenders like Tata Capital encourage borrowers to take business loans for start-up and there is no collaterals or guarantors required

There are also start-up loans where the loan is given in form a line of credit (LC) or for equipment financing. A line of credit operates like a credit card, where no security is required but interest rates are higher. In the case of start up, loans given for the equipment financing, the tools bought when starting the business is pledged as collateral. Hence, the interest rate charged is lower.

Points to ponder upon for any business loan

One must carefully consider the different charges associated with SME loan and start-up loan. Just comparing interest rates is not the best way to compare. Knowing your repayment capacity and EMIs when it comes to business loans is easy. Use our business loan calculator.

Find out the processing fees, foreclosure charges and any other amounts that you may be required to pay in the lifetime of loan servicing tenure. Charges for documents like duplicate repayment schedule, duplicate NOC fee, PDC charges are also important to know and understand.

Easy to use online access is an extremely important factor. Many financial institutions may be heavily offline oriented when it comes to giving business loans. If you are in the Millenial generation, online access is a must-have for your monitoring finance.

We hope that now that you understand the meaning and process of a business loan, an SME loan, and a start-up loan, you will be confident as you apply online.

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