Where to find SME business loans

7 min read
Maneka Tanwani

Micro, Small and Medium Enterprises (MSME) form the backbone of the Indian economy. These businesses contribute 45 per cent of the GDP and create jobs for about 40 per cent of the country’s workforce. The central government understands the pivotal role these businesses play in driving the economy and building global competitiveness. Hence it has introduced initiatives such as ‘Make in India’ and other schemes that look to make SME business loans easier to get.

Related: How to start a small business in India

Where to find SME business loans

Here are eight SME business loans a fledgling business owner or entrepreneur could use to get their business off the ground.

  1. Line of credit.
  2. Working capital loan.
  3. Term loan.
  4. Pradhan Mantri MUDRA Yojana.
  5. Stand-Up India scheme (minority business loans).
  6. PSB-59.
  7. Credit guarantee fund scheme.
  8. Business loans for women entrepreneurs.

This is a good time to be a startup business. The Indian government and others are making an effort to reduce red tape and speed approvals for small business owners looking for credit.

1. Line of credit

SME Business Loan Rupees
A line of credit can be used for any purpose and to fulfill any type of requirement.

A line of credit or overdraft facility can be availed from a bank or a Non-Banking Financial Company (NBFC). If the bank agrees, it will set a maximum amount it is willing to lend. The borrower can withdraw money any time until they reach the maximum set by the lender.

The lender charges interest only on the borrowed amount, not on the maximum amount.

Based on the length of the banking relationship, credit history and cash flow status, any bank may extend a credit line to the owner of a business.

Usually a line of credit facility requires collateral such as a fixed deposit or a specified balance in the account as prescribed by the bank.

Related: Domain name search: your first priority business startup task

2. Working capital loan

A working capital loan is similar to an overdraft facility. However, such funds cannot be used for anything else other than the day-to-day operational needs of the business.

Banks monitor the cash flow and inventory of the business to ensure the funds are used as agreed. The lender might also conduct periodical audits to ensure there are no defaults on the loan.

Ask your local bank branch about a working capital loan.

Approvals for such loans are swifter than credit lines. Customisation of terms are possible based on the borrower’s relationship with the bank.

These loans are extended for a brief period of time, usually spanning three to 12 months. Check with your local bank on the current interest rates for working capital loans.

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3. Term loan

Term loans are ideal for businesses that are looking to acquire or upgrade their physical assets such as:

  • Office buildings/machinery.
  • Product lines.
  • Open locations in new business territories.

These are called Capital Expenditures (CapEx) and require long-term funding. Term loans for MSMEs usually span three to seven years and are attached to collateral such as buildings, stock, machinery, etc.

The amount of funding possible and loan interest depends on the:

  • Sector in which the business operates.
  • The business’ credit rating.
  • Strength of the business balance sheet.
  • Valuation of the collateral.

A host of banks and NBFCs have quotas earmarked for small businesses. These loans are paid back through Equated Monthly Instalments (EMIs).

Term loans are cheaper than lines of credit and working capital loans.

Small business owners can shop around for the best possible deal. However, the turnaround time on applications and approvals is arduous. Most institutions require three years’ audited financials of the business, making term loans inaccessible to startups.

4. Pradhan Mantri MUDRA Yojana

SME Business Loan Tiny Cafe
MUDRA is meant to help the smallest businesses in India.

The Micro Units Development and Refinance Agency Ltd. (MUDRA) is an initiative of the central government. MUDRA makes low-cost credit available to the smallest of entrepreneurs in the remotest corners of the country.

These government business loans are disbursed through public/private sector banks, cooperative societies and rural banks.

MUDRA loans are open to businesses in the manufacturing, trading and service sectors.

Applicants need to comply with the eligibility set by the Micro Finance Institutions and register with MUDRA to avail of this SME business loan. Check the MUDRA website for the latest details, including funding levels and interest rates.

5. Stand-Up India scheme

The Stand-Up India scheme is an initiative of the government of India to provide minority business loans geared towards empowering those from the Scheduled Castes (SC) and Scheduled Tribes (ST) and to encourage women entrepreneurs.

The scheme funds greenfield initiatives with loans of up to 75 per cent of the estimated project cost.

Over 1.3 lakh bank branches across the country have been activated to make these loans available.

If applicants cannot find a branch close to them, they can contact the District Lead Manager in their home state or make a digital application through the Stand-Up India or MUDRA portal.

For the funding to be available, at least 51 per cent of the business stake has to be held by an SC or ST promoter and/or woman entrepreneur. Refer to the website for current details.

6. PSB-59

Public Sector Bank loans in 59 minutes is a quick-loan portal launched by the Prime Minister in November 2018. The online marketplace aims to speed up the process of application with minimal documentation.

Applicants need to feed in data or apply through a digital form. They can get in-principal approval for the loan in less than 59 minutes and receive credit within seven to eight business days.

7. Credit guarantee fund scheme

SME Business Loan Leather Bag
People who wish to start their own businesses now have more loan options than ever.

This is another initiative by the government, offered in collaboration with Small Industries Development Bank of India (SIDBI). It provides unsecured government business loans through the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS).

Unsecured loans do not require an asset such as property for collateral.

The application can be made through any of the 116 public, private, rural and foreign partner banks.

8. Business loans for women entrepreneurs

In addition to the Stand-Up India scheme, a handful of nationalized banks provide SME business loans that favour women entrepreneurs:

Most banks have the processing fee waived off and offer collateral-free loans at interest rates on par with MCLR. The structure of the loan differs from bank to bank, as does the tenure.

As the name suggests, the controlling stake of the business must be held by a female promoter.

To review

MSMEs contribute 45 per cent of India’s GDP and form the backbone of the country’s economy. There are a number of loans available to empower such businesses. These include:

  • Line of credit: An overdraft facility extended by banks to meet short-term funding gaps.
  • Working capital loan: A loan that can be availed from a banking partner to meet day-to-day operational needs of the business.
  • Term loan: A long-term loan that can be obtained from banks and NBFCs for larger capital expenses.
  • Pradhan Mantri MUDRA Yojana: A program that provides low-cost credit to businesses in rural India, disbursed via public/private banks and cooperative societies.
  • Stand-Up India scheme: The Indian government’s initiative to empower minorities and women entrepreneurs through SME minority business loans.
  • Public Sector Bank loans in 59 minutes: A quick loan portal that approves loans in 59 minutes.
  • Credit Guarantee Scheme: A loan that provides unsecured business loans to MSMEs in India.
  • Business loans for women: Powered by nationalized banks, these provide collateral-free business loans to encourage women to be financially independent.

Entrepreneurs and SMEs need to ensure that their licenses, documentation, financial report cards, etc. are in order to speed loan processing.

Launch your business with a loan

While small business owners have no dearth of ideas and ambition, it is usually the funding that is the Achilles heel.

These eight loans have the power to fuel millions of ideas in every nook and corner of India. Use them to bring your business idea to life.