In India, both banks and non-banking financial companies (NBFCs) provide different types of loan products to the small and medium enterprises (SME). Some of these loan products are collateral-free, whereas others require the borrower to pledge his personal or business assets as collateral. Likewise, some of these loan products require the borrower to pay equated monthly installments (EMIs), whereas others allow borrowers to choose from multiple repayment options. At the same time, the new age business loan products even enable SME owners to fund working capital needs by converting current assets into liquid assets. That is why; it becomes essential for entrepreneurs to understand and compare different types of SME loans in India.
Understanding 7 Different Types of SME Loans in India
1) Term Loans
In India, term loans are one of the mature and popular forms of SME loan. Some lending institutions provide long-term business loans for acquisition of fixed assets like land, building, plant and machinery. At the same time, the entrepreneurs also have option to fund working capital needs through short-term loans. The amount, tenure, and interest rate of term loans even differ from one lender to another. Some lenders charge fixed interest rate on term loans, whereas others support floating interest rate. But each lending institution requires the borrowers to repay the term loan by paying EMIs. Many new age lending institutions even leverage latest financial technologies to disburse term loans in 48 hours.
2) Cash Credit Facility
Many lending institutions extend cash credit facility to small and medium business owners against their current assets. An entrepreneur can avail cash credit facility by pledging a variety of current assets as collateral – raw materials, stock in trade, unpaid invoices, and account receivable. The lending institution will extend cash credit facility in the form of overdraft. The amount of the overdraft will vary according to the value of current assets pledged by the business owner. Also, the amount of overdraft will remain unchanged over a period of time. The entrepreneurs can fund working capital needs quickly by leveraging cash credit facility as a form of revolving credit.
3) Bank Guarantee
The entrepreneurs have option to avail a variety of bank guarantees – financial guarantee, advance payment guarantee, deferred payment guarantee, performance guarantee and foreign bank guarantee. The lending institutions provide bank guarantee to existing customers based on their current requirements and past financial transactions. They even charge specific fees to issue bank guarantees. Some lenders even require business owners to pledge current assets or equities as collateral to avail bank guarantee. The small and medium business owners can leverage bank guarantee to convince their suppliers or customers that the contractual obligations will be met exactly.
4) Asset-Based Business Loans
In India, SEMs often find it difficult to access unsecured or collateral-free credit on time. But many lending institutions provide credit to business owners against their personal or business assets. The amount of asset-based business loans varies according to the market value of the assets pledged by the borrower. Also, the borrower is required to pay interest at a lower rate in comparison to unsecured business loans. The lending institutions provide asset-based business loans to entrepreneurs against a variety of assets – property, gold, shares and business assets.
5) Bill/Invoice Discounting
Unlike other business loan products, bill or invoice discounting enable entrepreneurs to fund working capital need by converting current assets into liquid assets. There a number of lending institutions in India that enable business owners to avail funds by discounting bills of exchange, promissory notes, or unpaid invoices before their due date. The entrepreneur has to sacrifice a percentage of the principal amount as discount. But the option will help them to fund working capital needs in a simpler and faster way without increasing overall debt burden.
6) Point of Sale Finance
The new age loan product enables entrepreneurs to avail credit based on the monthly sales routed through EDC terminals. At present, a number of NBFCs provide Point of sale finance to entrepreneurs in India by leveraging financial technologies. Unlike conventional loan products, POS based business loans enable business owners to avail credit based on real-time data – monthly debit and credit card sales. The entrepreneur can even avail additional credit by promoting cashless payment. Many lending institutions even allow borrowers to repay the Point of sale finance through either fixed daily installments or daily percentage installments. Here are 7 important things to know about Point of sale finance.
7) Pradhan Mantri MUDRA Yojana (PMMY)
The Government of India has launched PMMY with the aim to make credit available to SMEs from non-agricultural sector. PMMY enables entrepreneurs to avail credit under three distinct schemes – Sishu, Kishore and Tarun. An entrepreneur can avail credit up to Rs 50000 under Sishu scheme, up to Rs 500000 under Kishore scheme, and up to Rs 1000000 under the Tarun scheme. Each category of MUDRA loan is unsecured and collateral-free. Also, the borrower can use the loan proceed to both launch new business ventures and fund working capital needs.
On the whole, the entrepreneurs have option to choose from a wide range of SME loans in India. Some of these loan products are conventional, whereas others are modern and technology-driven. But the borrowers must remember that the SME loan products differ from each other in a number of aspects – loan amount, interest rate, repayment tenure, collateral requirement, and business loan eligibility criteria. Hence, they must spend some time to compare the SME loans provided by various lending institutions in India.