Types of SME Loans to Check During Small and Medium Business Financing

SMEs or Small and Medium-sized Enterprises in India have been the propellers of economic growth in the country. Their presence across industries and sectors as well as in all regions of the nation remarks their dominant presence. The consistent support from the Central and the State Governments only makes these enterprises more flourishing. And why not; SMEs’ output contribution today account for a significant chunk of the country’s GDP.

In this scenario, it is only called for that sufficient financing available as SME loan is provided to the growing small and medium-sized businesses. However, when it comes to SME financing, the challenges related to scope of operation, scale, and financing need remain highlighted. Thus, to fulfil these varying requirements, financial institutions provide business loans to SMEs tailored for different purposes, scale, and business operating needs. We will take a look at them one by one.

Types of Business Loans for SMEs

SME loans can be identified under different categories based on the following aspects.

1. Collateral requirement

Business loans for SMEs can be sub-divided into 2 types based on their needs for collateral.

• Unsecured business loans: An unsecured business loan lacks the need for an applicant to provide an asset as security. Instead, the lender lays down some mandatory rules which need to be met to avail funding.
• Secured business loans: An SME business loan that requires you to provide an asset as collateral for approval of the financing is known as a secured business loans. It also comes with some eligibility requirements, which are often lenient as a higher weightage is given to the presence of an asset as collateral.

1. Tenure flexibility

Business loans for SMEs can also be classified as term loans with varying tenure based on the period for which they are available. The 3 prime funding categories under term loans include –

• Short-term: A short-term business loan is provided for a tenure extending between 6 months and 1 year. These advances are usually availed to fulfil operating financing needs of an SME.
• Mid-term: SME business loans that are available for a duration ranging between 2 years and 5 years can be classified as mid-term loans. They are availed usually for meeting financing needs that require capital investment for similar duration.
• Long-term: These are advances whose tenure can extend beyond 5 years and can go up to 15 or 20 years. They are usually availed for meeting capital expenditure needs of an SME.

While this was the detailed term loan categorisation, it does not indicate a hard and fast tenure determination. One should thus expect tenure flexibility and classification based on the lending institution selected for an SME loan.

1. Purpose-specific loans

SMEs can also avail loans and advances that are provided for customised expenditure needs of business. Some of them include the following. A lender may also provide other customised business loans based on the SME’s requirements.

• Working capital loan: These are usually short-term advances and are provided for SMEs to fulfil their immediate financing needs, such as cash shortage, operating capital infusion, inventory restocking, wage payment, and the likes. They are also usually unsecured advances requiring no collateral.
• Machinery loan: A machinery loan can either be a mid-term or a long-term advance. Lenders provide machinery loans as both secured and unsecured loans for plant and machinery purchase, renovation, or upgradation of the business.
• Invoice financing: It is another short-term funding option where the unpaid invoices are leveraged to raise proportionate funding.
• Loans for business expansion: One can also avail an SME business loan to meet varied expenses during business renovation or expansion.

Apart from these, SMEs also benefit from various government-aided schemes for benefitted financing. When availing an SME loan under the categories mentioned above, make sure to compare interest rates and features of the advance for convenient business funding.