Arranging for money for business expansion is not a tranquil job. A business owner can avail SME loan to meet his financial business requirements. The money can be invested to acquire different resources, such as machinery, labour, etc. An SME loan is essentially a debt that a business avails and has to repay along with interest cost.
It is a borrowed capital that comes with some terms and conditions. Before granting money, the loan lenders want to ensure that the business is capable enough to repay a loan. So, the business owner should have a clear cut idea of how the money will be used. Else, there is a high chance that his loan application will be denied.
Now let’s take a look at the different kinds of SME loans that the business owner can avail:
Working Capital Loan
The working capital loan is a short-term loan that is used to finance the day-to-day operations of the business. It includes inventory purchases, paying wages, advertising and marketing, etc. This type of SME loan can also be availed in contingency situations.
Upgraded machinery or equipment is very crucial for a business in terms of increased output and decreased defected pieces & cost per unit. New machinery can be bought using a machinery loan. The business owner can also avail a machinery or equipment loan to upgrade the existing machinery.
This type of business loan is availed for a short-term, usually ranging from 12 months to 24 months (1-2 years). The loan for business availed under this type is usually a small loan amount.
The flexi business loans are like a credit card. Here, the only difference is that a credit card can be used for various purposes. However, a flexi loan can only be used for business. Here, the lender sanctions a business loan amount for the applicant. And the applicant can use the funds for his business up to the limits. Notably, the loan interest would only be charged on the amount borrowed. The applicant would be charged a minimal fee for this type of loan.
Major SME Loan Requirements
These are a few important business loan requirements that the borrower has to meet to get the loan application approved. Although the eligibility for loan differs from one lender to another, the following is a list of common points:
- Minimum business turnover of Rs. 5 lakh in the last year.
- The ITR filed in the last year should be more than Rs. 1.5 lakh.
- The business should be in operations for at least two years.
When a business owner applies for a loan for business, his credit score should be more than 700. It is a crucial loan eligibility criterion that is required by almost every loan lender in India. If the business owner meets all these requirements, he can easily avail a loan for his business.
That being said, it can be concluded that an SME loan is indeed the best option for small business owners who are facing a lack of funds. And with so many loan lenders operating in the market, including NBFCs, availing a business loan has become extremely easy.