SME financing in India

7 Different Types Of SME Loans Available In India

June 27, 2022 • 4735 views
Author: PoonawallaFincorp Category: Business Loan

At some stage in the business lifecycle, you will require finances to meet your business needs. Business demands often range from purchasing new stocks to buying real estate, a factory, a storefront, or modern machinery, to essential running expenditures such as overhead and payroll. In such cases, depending on microfinance solutions such as SME funding in India may appear logical.

According to the World Bank, around 80% of industrial companies in India are small, medium, and micro-enterprises that employ over 117 million people and account for 40% of the nation's manufacturing output. Because of their considerable contribution to the national economy, the government and financiers have provided significant financial help in the form of SME financing in India. Firstly, let us answer the question: what is an SME Loan?

What is an SME Loan?

An SME Loan means getting a loan that caters to the financial requirements of the Small and Medium Enterprise (SME) category. This category is responsible for creating many jobs at relatively modest capital costs while also assisting in the industrialization of backward and rural regions. In addition, SMEs play an essential role in the nation's growth by considerably boosting export profits and contributing significantly to domestic output.

Different Types of SME Loans in India

Term Loan

One of India's most sought-after forms of SME financing is a term loan. It can be both secured and unsecured. Some lenders would lend up to Rs. 30,00,000. However, the company's credit history determines the bank loan. An unsecured term loan has a payback period of 1 to 5 years. If you choose a secured loan, the term might range from 15 to 20 years. A term loan is often obtained for a specified reason, such as capital spending.

Loan for working capital

This working capital loan in India tries to overcome financial shortages to ensure the firm's smooth running. You may receive cash to cover your business's day-to-day operational demands with this form of a loan.

It allows you to deal with a financial shortage throughout the offseason. This form of loan accommodates high season demand. Borrowers such as manufacturers, content providers, distributors, and retailers benefit the most from it.

Also Read: Pros and Cons of Long-Term Business Loan

SME Loan secured by real estate

It is another micro-financing solution to fulfil your company's needs. It is, as the name implies, a form of secured loan in which you must guarantee your property as security. The loan amount is usually greater than Rs. 50,000,000. You can obtain a loan against a home or commercial property.

You can borrow up to 70% of the market value of your house. You must confirm that the title to your property is clear and unencumbered. In addition, your mortgaged estate must be clear of legal proceedings. Your lender's payback period might range from 15 to 20 years.

Financing for Equipment

It is an SME Loan in India that meets manufacturing businesses' needs. It is among the most popular forms of SME Loans India-wide. It allows you to purchase expensive equipment for the seamless running of your firm. Moreover, it is secured, implying that you must guarantee the machinery's security.

You can obtain an amount of the loan depending on your need. You will need to persuade your creditor that you can make payments within the specified EMIs. Generally, the interest rate is much lower than term loans.

MUDRA Yojana by Pradhan Mantri

A new SME Loan in India allows applicants to borrow up to Rs. 10,00,000. However, the type of your small business determines the size of your loan, such as

  • Shishu - Shishu can obtain a loan of up to Rs. 50,000 at an interest rate ranging from 1% to 12% per annum
  • Kishore - A Kishore loan could get you amounting to Rs. 5,00,000 at an annual interest rate of 8.60 per cent.
  • Tarun - With a Tarun loan, the loan amount could go up to Rs. 10,000,000 every year at an annual interest rate of 11.15 per cent.

Each category represents a different stage of growth. Pradhan Mantri MUDRA Yojana is an Indian microfinance alternative that addresses your individual operating capital requirements. It also allows you to receive a loan for tractors, two-wheelers, and other commercial vehicles.

Cash Credit

You can obtain cash credit by pledging current assets as security. These assets can include:

  • raw materials
  • accounts receivable
  • stock in trade
  • outstanding bills

Borrowers can also use the cash credit facility as revolving credit to increase their working capital. Borrowers can also obtain an overdraft capacity from a financial institution with whom they already have an account.

Suppose a borrower does not like to guarantee their assets to obtain a loan. In that case, they can request financial aid from financial institutions that offer medium-sized company loans with no collateral. In addition, small and medium-sized business owners can use services such as invoice factoring to support their operations. However, one should note that the amount of credit available may not be considerable or sufficient with this kind of SME lending.

Also Read: Top 10 Government Subsidies for Small Business


It is a government-sponsored SME program that allows applicants to receive loan approval in as little as 59 minutes. This plan will enable you to obtain up to Rs. 1 crore in less than an hour. In addition, it has a cheaper interest rate than other lending choices, with rates starting as low as 8.50 per cent. Both banks and non-banking finance companies in India offer it.

When you register for a business loan for MSME, the borrower will look at your income/revenue, repayment ability, and previous financial commitments to see whether you qualify. Because minimal documentation is required, this is one of the fastest ways to get cash to suit your company's demands.

Small Business Loan from Poonawalla Fincorp

Poonawalla Fincorp offers collateral-free Small Business Loans at attractive interest rates, starting at 15% per annum. It provides a hassle-free application process by setting easy eligibility criteria, that enable you to attain your business goals. Furthermore, it offers flexible repayment tenure that ranges from 6 months to 36 months to empower small businesses and fulfil their diverse business needs. With a completely online application facility, it becomes even more convenient to apply for a Business Loan from Poonawalla Fincorp.


Understanding SME finance's meaning is the first step toward financing your small business. There are various methods for obtaining a loan for your organization. However, before asking for an SME Loan in India, assess your business needs and your repayment capabilities to ensure punctual repayments and prevent additional financial burdens.

SME owners should gather the required information and assess their operational needs to match their financial needs with a suitable financing choice. Because the contract terms for each SME finance, as well as the rate of interest, tenure, and repayment choices, differ from lender to lender.

Frequently Asked Questions

  • How can I repay my SME loan?

There are various SME funding options available in India. You can repay your SME loan by making timely EMI payments, considering debt consolidation, or opting for a shorter SE loan tenure. 

  • Can I get an SME loan without providing any collateral?

Yes. SME loans can be both secured and unsecured. You can avail of SME funding from banks and Non-Banking Financial Companies (NBFCs). 

  • Can I prepay my SME loan?

Yes, you can prepay your SME loan. The prepayment or foreclosure charges vary from lender to lender. 

  • What is the maximum amount of loan I can avail of under the Pradhan Mantri Mudra Yojana (PMMY)?

Under the Pradhan Mantri Mudra Yojana, you can borrow funds according to the size of your business, which is represented by three categories, Shishu, Kishore, and Tarun. 

  • Is there a special SME loan for women entrepreneurs?

Yes, women entrepreneurs can avail of SME Loans in India under the ‘Stand-Up India’ scheme. Women entrepreneurs can borrow SME funding from Rs. 10 Lakh to Rs. 1 Crore under this scheme. 

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