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What Are the Types of Business Loans Available To SME in India

Author: Kiran Chopra
by Kiran Chopra
Posted: Feb 01, 2020
term loans

There are different business loans available for SMEs in India. There are SME loans that require collateral, while some do not. The payment terms also differ, as well as the interest. Some types of loans’ interest rates are calculated using EMI or equated monthly installment, while some provide borrowers with multiple repayment options. Due to the various types of available loans in India for SME, it is highly suggested that one should know each first before pursuing a loan.

Types of SME loans In India

As previously discussed, there are many types of loans for SME in India. Getting a business loan in India must not be done in a rush or else, you might end up regretful as you failed to acquire the most suitable for your business needs.

Below are 7 of the SME finance loans available in India:

  • Term loans

This is one of the oldest types of loan and actually the most popular in the country. Term loans come in short and long term. Long term is where the business owner would need to acquire expensive assets, such as plant, machinery, building and land. Getting short term loans on the other hand is for business needs or assets that are not too expensive and can be repaid after a few years.

Different institutions providing such loan may use fixed interest rate or floating interest rate.

  • Cash credit facility

This type of loan on the other hand is assessed through the business current assets. Business owners can get loan using their current business asset as a collateral, such as stock in trade, raw materials, accounts receivable and unpaid invoices.

The amount to be loaned is dependent on the amount of the asset that will be used as collateral.

  • Bank guarantee

There are different types of bank guarantees borrowers can consider, and to name them:

  • Foreign bank guarantee
  • Performance guarantee
  • Deferred payments
  • Advance payments
  • Financial guarantee

Bank guarantee is being issued by the financial institution with a fee. The amount of the loan is dependent on the existing customer’s previous financial transactions and current requirements.

  • Asset-based business loan

This is actually one of the SME India Finance loan that is the easiest and fastest to get approved as it has a collateral. The borrower will use any of his assets as a collateral, such as land, machinery or building. In the event that the payment is not made, the lender has the complete authority to take the asset from the borrower.

The amount of such loan is dependent on the amount of the asset that will be used as a collateral. Compared to loans with no collateral, this loan offers borrowers with lower interest rate. Needless to say, companies should be more careful acquiring this loan as there is a property or asset at stake when a missed payment is committed.

  • Bill invoice discounting

This type of loan converts current assets to liquid assets. Promissory notes, unpaid invoices, and bills of exchange are liquidated before its due date, in discounted prices. The amount to be discounted is dependent on the percentage required by the lending institution.

  • Point of sale finance

This loan is based on the business’s monthly sales. The business’s real-time monthly data – monthly credit and debit card sales. Hence, some companies, to be able to get additional loan would encourage their customers to pay using cashless payments.

Some institutions allow their borrowers to pay such loan by daily percentage installment or fixed daily installment, hence easier for businesses to pay and manage their debts.

  • Pradhan Mantri MUDRA Yojana

This type of loan is introduced by the Indian government to support the non-agricultural sector. These types of loans offers three schemes, Kishore, Tarun, and Sishu. For the Sishu the scheme, the borrower can borrow up to Rs 50000, while the Kishore scheme allows up to Rs 500000 and the Tarun scheme lets the borrower get up to Rs 1000000.

Pradhan Mantri MUDRA Yojana or PMMY is for borrowers who are planning to start up a business or fund their business’s working capital needs.

Getting small business loan has many benefits provided that the borrower was able to consider the best type of loan suitable to their business needs.

About the Author

Kiran Chopra is an experienced financial expert. He writes for several online publications about Sem Finance, finance, health and fitness etc.

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Author: Kiran Chopra

Kiran Chopra

Member since: Jan 29, 2020
Published articles: 1

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