Everything to learn about SME loans for new business

SME finance is providing loans to Small and Medium Enterprises. Here is a complete guide about SME loans. Who are eligible? What documents should be produced? What are the eligibility criteria?

Who are eligible to get SME loans?

Different countries have fixed the SME threshold in different ways. Till 2020, India defined SMEs as follows:

A small enterprise is an enterprise whose investment is between Rs 25 lakhs and Rs 5 crores. A medium-sized enterprise is that enterprise whose investment is between Rs 5 crores and Rs 10 crores.

After COVID, the definition was changed in order to increase the benefits availed by the SMEs. It is as follows:

·       Small Enterprise: Investment up to Rs 10 crore and turnover up to Rs 50 crore

·       Medium enterprise: Investment up to Rs 50 crore and turnover up to Rs 250 crore.

Is it beneficial to take SME loans?

The Government of India is on the path of bringing self-reliance to the country. In order to achieve this, it is focusing on developing the SME sector. This is done by availing more loans to SMEs through private financial firms. The bottom line, right now the SME loan interest rate is at its lowest. Thus, this is the right time to take SME loans and get benefitted. And this will go on till post-COVID economic recovery.

Eligibility criteria

Purpose: the purpose of the SME loan for new business in India should meet the business requirements. This includes availing working capital, machinery, raw materials, marketing products, entering a new location, and expanding product line or employment base.

Age of the applicant: Should be between 25 years and 55 years

Experience: Minimum of three years of experience in business

Proof: To prove the business experience, the borrower should provide the last year's business IT returns.

Documents required to apply for SME loans India

The following documents are required when applying for SME loans:

Bank account details, parent company details, existing loan details, annual accounting report, personal guarantee letters, business registration documents, copy of sales tax returns, sector-specific licenses (in case of pharmaceuticals), copy of income tax filings documents, Sales tax receipts, Business registration documents, Registration certificate, annual accounting report, liquidity – oriented details.

Questions to ask before taking an SME loan

How is my loan repaying ability calculated?

The SME finance companies in India prefer to keep the debt-to-service ratio at 25%. It is the ratio between EMI and income. This means that the borrower can use 75% of the income for other commitments.

Can I close the loan before its tenure? Yes.

What is the market value of the property? It is the value of the property that the borrower intends to use as collateral

What is a loan to value ratio? It is the amount of loan provided as compared to the market value of the security.

Tips to select the right SME loan

·       The borrower should be upfront about his financial condition.

·       Be realistic about how much one needs to borrow

·       Realize the lenders cannot help in creating the business plan

·       Learn the basic financial terms before visiting the financial firm

·       Always guarantee the loans personally

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