SME financing in India

7 Different Types Of SME Loans Available In India

June 27, 2022 • 7738 views

In India, small and medium-sized enterprises (SMEs) play a significant role in the growth and employment opportunities of the Indian economy. However, these enterprises may face a financial crunch to expand their businesses. 
In such scenarios, SME loans from various financial institutions help in expanding and fulfilling the capital requirements. Read on to learn about SME loans, types, benefits and more. 

What are SME Loans?

An SME Loan is a type of business loan that caters to the financial requirements of the Small and Medium Enterprise (SME) category. These enterprises are responsible for creating several jobs at relatively modest capital costs while assisting in the industrialisation of backward and rural regions. In addition, SMEs play a significant role in the nation's growth by boosting export profits and contributing significantly to domestic output.

Types of SME Loans in India

There are several types of SME loans you can choose from according to your requirements. They are as follows:
1.    Term Loan
A term loan is one of India's most sought-after forms of SME financing. It can be both secured and unsecured. Some lenders would lend up to ?30 Lakh. However, the company's credit history determines the bank loan. 
An unsecured term loan has a payback period of 12 to 60 months. If you choose a secured loan, the term might range from 180 months to 240 months. A term loan is often obtained for a specified reason, such as capital spending.

2.    Loan For Working Capital
The 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 and accommodates high season demand. Borrowers such as manufacturers, content providers, distributors, and retailers benefit the most from it.

3.    SME Loan Secured by Real Estate
It is another micro-financing solution to fulfil your company's needs. As the name implies, it is a form of secured loan in which you must guarantee your property as security. The loan amount is usually higher than ?5 Crore. You can obtain a loan against a home or commercial property.
In addition, you can borrow 70% of the market value of your house and have to ensure that the property is debt-free and clear. The payback period of this loan ranges between 180 months to 240 months and you have to ensure that the property is clear of legal proceedings.

 4.    Financing for Equipment
It is an SME Loan in India that meets manufacturing businesses' needs, making it one of the most popular forms of SME Loans India-wide. Through this loan, you can 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. Moreover, 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.

5.    MUDRA Yojana by Pradhan Mantri
A new SME Loan in India allows applicants to borrow up to ?10 Lakh. However, the type of your small business determines the size of your loan, such as:

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

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.

6.    Cash Credit
You can obtain cash credit by pledging current assets as security. These assets can include raw materials, accounts receivable, stock in trade and outstanding bills. Borrowers can also use the cash credit facility as revolving credit to increase their working capital. In addition, you can obtain an overdraft capacity from a financial institution with whom they already have an account.
Furthermore, 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.

7.    MSME Loan
It is a government-sponsored SME program that allows applicants to receive loan approval in as little as 59 minutes. It enables you to obtain up to ?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%. 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, repayment ability, and previous financial commitments to see whether you qualify. Hence, the minimal documentation procedure makes it one of the fastest ways to get finance to fulfil your company’s demands. 

ALSO READ :- Useful MSME Business Loan Tips for Young Entrepreneurs

Benefits of Obtaining an SME Loan

SME borrowers usually SME loans to expand and grow their businesses and meet their working capital requirements. Here are a few benefits of obtaining an SME loan:
1.    Competitive Interest Rates
The interest rate of SME loans is more affordable than other types of business loans, making it one of the most popular business loans in India. However, the interest rate will depend on your credit profile, business performance and other criteria.
2.    Huge Loan Amount
You can avail as high as ?30 Lakh of SME loan to expand and grow your business without any end-use restrictions as it is a type of unsecured loan.
3.    Flexible Repayment
SME loans have a repayment tenure of 60 months, making them one of the most popular types of business loans. In addition, you can choose the monthly instalment payment according to your repayment capacity. 
4.    No Collateral Needed
Since SME loans are unsecured types of loans, you do not have to keep any collateral, security or guarantor with the financial institutions.
5.    Nominal Additional Charges
The part-payment, foreclosure, processing fee and late payment penalties of SME loans are nominal, reducing the financial burden in case of a financial emergency.

How to Apply for an SME Loan in India

Here are a few simple and hassle-free steps you can follow to apply for an SME loan in India:

  • Step 1: Click the ‘Apply Now’ button to fill out the application form.
  • Step 2: Enter your details and upload all the necessary documents.
  • Step 3: Click the ‘Submit’ button to complete your application procedure. 

Common Mistakes to Avoid When Applying for an SME Loan

Before applying for an SME loan in India, you must be aware of the common mistakes so that you can avail the loan seamlessly:
1.    Lack of Research
You must research various financial lenders before applying for an SME loan, as it is essential to know their eligibility criteria, interest rates and terms associated. Not doing so can lead to the selection of a loan type that does not align with your business requirements.

2.    Ignoring Credit Score
Neglecting your credit score will restrict you from getting an SME loan from financial institutions, as it defines your creditworthiness. Having a good or high CIBIL score enables you to get SME loans at lower interest rates and favourable terms and conditions. 

3.    Not Having a Business Plan
If you do not have a solid business plan, the lending organisation will have confidence that you can repay the amount. A comprehensive business plan containing your company’s objectives, repayment strategies and financial projections enables lenders to trust you.

Small Business Loan from Poonawalla Fincorp

Poonawalla Fincorp offers collateral-free business loan at attractive interest rates, starting from 15% per year, with a repayment tenure ranging from 6 to 36 months. It enables you to obtain business goals by providing a hassle-free application process. In addition, the minimal eligibility criteria and online application procedure assist you in applying for credit conveniently from Poonawalla Fincorp. 

To Conclude

Knowing the different types of SME loans available in India will enable you to choose the right loan according to your business requirements. In addition, SME loans provide a boost to your business so that you can grow and expand your business for the long term. However, ensure that you avail of SME loans from trusted financial lenders like Poonawalla Fincorp to get affordable interest rates and long repayment tenure. 

Frequently Asked Questions about SME Loans

1.    How can I repay my SME loan?
You can repay your SME loan by considering debt consolidation, making timely monthly payments or choosing a short loan tenure. 

2.    Can I get an SME loan without providing any collateral?
Yes, you can avail SME loan without providing any collateral or security to the financial organisation. 

3.    Can I prepay my SME loan?
Yes, you pre-pay your SME loan amount. However, the pre-payment and foreclosure charges will vary from one lender to another.



We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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