Guide to SME Business Loans in India

Guide to SME Business Loans in
India
The first thing that comes to your mind when you hear the term loan is the
liability or maybe interest. Yes! These both terms divert your mind and send
you into a situation known as ‘stress’ to most of us. Loans are a way to fulfill
your needs and divert it to a better lifestyle. Most of us borrow loans from the
financial institutions to overcome our financial weaknesses. Also, a major
chunk of this market i.e. the financial market where banks function goes into the
financing of the SME or MSME institutions. SME or MSME are the Small
Medium Enterprise which holds a major chunk of our economy and are
responsible for the contribution of employment to the Indian economy in 4/5
cases. But, the SMEs lack the knowledge and the funding to start new
businesses. This becomes a barrier for them. To overcome this problem we,
Finance Buddha provide you with business loans for your SME and also guide

you about it that how you can opt for a loan and what are the criteria and other
details in a meticulous way. Here, is the guide to SME business loans and the
things to be kept in mind before applying.
7 GUIDING STEPS TO SME BUSINESS LOANS IN INDIA
Purpose:
The first step towards any business loan is the purpose of the business loan. You
must know the purpose of your loan and the requirement that is necessary to be
fulfilled at that particular stage in the business. The level of importance decides
the need for a loan for a particular business. The needs can be of many types
such as expansion of the business especially to a new location or a new city,
launch of a new product in the market to satisfy the gap, warehousing, running a
campaign for the promotion of a new product, marketing of the company, hiring
new employees in the company and many other purposes come into the picture
when you have insufficient funds to fulfill them. These purposes or needs can
be fulfilled when you take a business loan for your SME. The purposes may
differ based on the sector you are into i.e. manufacturing or service.
Eligibility:
You must check the eligibility for the loan before taking the loan from a
financial institution as they may reject your proposal if you are not appropriate.
The eligibility criteria for different institutions are different when you go for a
business loan. But, these are some basic things that you should consider in mind
when you go for a business loan. You must, first of all, check your CIBIL score
before applying for a business loan. A CIBIL score is the credit score which is a
mirror reflection of your credit ability in the market. Also, the eligibility differs
from the nature of the business you are into i.e. manufacturing and services. If
you are an existing business then you should update your financial records,
calculate the net worth of your assets and maintain your bank statements if you
are applying for a business loan. Other documents may also be asked for if the

financial institution needs them for further verification. They might also ask for
the business model and your previous documents if you already have a business
and your profit and loss account and balance sheet.
Low Interest Rates:
You must also take into consideration while taking the business loan for your
SME the interest rate as this may affect the growth of your business and may
also turn out to be negative for your business. If your business has not got many
turnovers then you must opt for a loan which has got lower interest rate. Also,
the loan a businessman can opt for if the turnover is low is a loan against
property where the property is kept as collateral and the interest rate is low as
10%. This can also be changed by lending a bank overdraft or a cash credit
where the interest rate is at 11-13%. On the other hand when we take into
consideration the personal loan the interest rates go as high as up to 24% if you
have a low credit score in the market. So, you must check the best interest rates
before going to the business loans and opt for the one where the interest rates
are low and there is less risk. Lastly, you should take into account the assets
which are being used as collateral when you are taking the business loan for
your business purposes.
Low Cash Outflow:
Yes! The cash outflow in the business should be kept low initially when the
business loan is taken for the expansion or some other purpose. This is a very
important aspect to be considered. If your cash outflow is higher than your cash
inflow then you must amend it immediately. The only cash flow you can afford
at the moment is the payment of the loan and the interest of the loan. Cash
outflows include the payment of the salaries, bills, rents, maintenance and
dividend and other outflows. For overcoming this problem the best option that
can be adapted is by borrowing the loan from your friends and family at low-

interest rates which can be very much beneficial for you and you can maintain
the cash flow. The minimum cash outflow can also be possible by taking
advantage of the bank overdraft service since only the interest needs to be paid
regularly and that too on the amount used. A personal loan, on the other hand,
would result in huge cash outflow which is not advisable for the business.
Low Processing Fees:
The processing fee is taken in the initial moment when the loan is sanctioned by
the bank. Ideally, this thing should be kept low as it results in benefit for us.
Personal loan charges 2% initial processing fees and other loans also charge in
the range of 1-3% as the initial processing fee. There may be additional charges
too as the bank charges other fees too.
Collateral Requirement:
Collateral is an asset which is kept against the loan. Every loan demands
collateral against the loan except for the personal loans and the loan from the
local lenders. The loans need to be backed by the security which should not be
kept at risk. If any contingency happens and you are unable to pay back the loan
then this becomes a point of concern for you as the assets would be confiscated
by the banks. For the risk level to be kept minimum one can opt for gold loans.
Gold loans are available at low interest and can be repaid easily without the fear
of the loss of the asset. The second best option can be the overdraft facility
provided by the bank followed by the bank. Lastly, the requirement should be
given proper importance for the loan as the asset is at risk.
Future Payment Ratios:
You must always take this thing as a priority that whenever you’re taking a loan
for any purpose the ratio of your EMI to your income should not be more than
25% which is normal. This gives you an edge over the banks over the payment
ratios. The payment should be kept properly and without any delay as most

commercial loan lenders agree to some certain key ratios while the payment of
the loan such as current ratio, a debt-equity ratio which results in the certain
defined limits. This is kept so that during the time of any contingency if your
payment falls below the agreed ratio that can affect your credit ability in the
market and mark you in the default risks. Moreover, you should keep it at a bit
lower side to maintain the timely payments and to maintain your credit in the
market.
There are also multiple other factors while you are sanctioning a loan as a
representative of the SME should take into account. If any of the employers you
are working with has a bad reputation in the market then the sanction of your
business loan becomes tough and you might be charged with additional interest
i.e. interest higher than the normal one or you might be only provided with only
65-70% amount of the loan as compared to a person who has got a good
reputation in the market. Also, you must check that you don’t have any criminal
background at the time of applying for the loan as this results in a negative
impression for your SME and directly results in the cancellation of the proposal.
Lastly, when you apply for an SME business loan you should have a stable
business of at least 5 years in which the records should be showing the growth
of the business in the previous 5 years.
We at Finance Buddha, help you to avail the best business loans for your SME
without any much hassle. You just need to upload the necessary documents and
you can get the loan sanctioned.