• Guide to Small and Medium Enterprises (SMEs) Loan

    sme loans india / sme business loans / types of sme loans
    SMEs, or Small and Medium Enterprises, are the foundation of our country’s economy. They are essential in increasing employment rates, fostering innovation, fulfilling rising population demand, and improving the economy. However, this segment’s consistent challenge is the need for readily available funds. That is where SME loans come into the picture.

    This guide on SME loans will inform you about the features, documentation, approval considerations, and areas where you can use this loan product.

    Features of SME Loans in India

    Some of the common features of different types of SME loans include

    1. Flexible repayment plans:

    SME loans come with a flexible repayment schedule. That means you may choose your tenure based on income and other obligations. The lender simply defines the minimum and maximum tenures. It is worth noting that repayment tenure significantly impacts your budget. The longer the payback period, the smaller your monthly commitments, but it also means a considerable amount of interest payable.

    2. Competitive interest rates

    The interest rate on an SME loan varies by business profile. You can get capital at a reasonable rate if you have an established business with continuous revenue.

    3. Collateral-free

    SME loans don’t necessarily demand collateral. This makes it easier for businesses that do not have a valuable asset to use as collateral to raise funds. However, even if you do not meet the lender’s standards, you can file commercial property-related paperwork with your lender and acquire loans at reasonable rates.

    4. Speed and convenience:

    Since these loans are available without collateral, lenders do not need to spend hours doing property appraisals to determine the loan-to-value ratio.

    You only need to apply to the lender online by filling out all the necessary information and attaching business-related documents, as well as evidence of identity, address, and income. The lender uses machine learning and artificial intelligence technology to assess the risk associated with the profile and, if everything checks up, makes the disbursement.

    4. Balance Transfer

    There is a good chance that you did not have enough credit history when you applied for funds. Therefore, you were approved for a high-interest loan. In such cases, MSME loans allow you to transfer the outstanding loan debt to another lender at a reduced interest rate.

    However, you should choose this option if the remaining years in the loan closure are 3-4. If only a few months are left, the processing charge associated with the transfer process may make this alternative expensive.

    Documents Required for SME Loan Approval

    Category Document Type
    Common document Firm/ Sole Proprietorship/ Company PAN card
    Identity Proof Aadhar Card, Passport, Voter ID card, Driver’s license, PAN card
    Address Proof Driver’s license, Passport, Aadhar card, Voter ID card
    Income Proof Latest six months banking transaction record, Balance Sheet, Latest ITR along with income computation
    Business Continuity Proof Trade license, Sales tax certificate, ITR, Establishment certificate
    Other Documents Memorandum & Articles of Association, Partnership deed, Board resolution

    Factors Affecting SME Loan Approval

    Credit History

    Credit history represents detailed information about how many loans you have taken in the past, how you paid your instalments, and whether you have a history of EMI misses or defaults. You should expect your loan approval to go smoothly if you have a good payment history.

    Business Age

    Businesses do not lend to startups because they lack experience and have no credit management history. In fact, most lenders only allow funding for organisations that have at least three years of continuous experience in their current industry.

    However, just having the business vintage would not help you receive quick approval or an affordable SME loan interest rate. You must also demonstrate that your company has consistently generated a profit.


    The company’s cash flow defines the inward and outward movement of funds in the business. Suppose the inflow is less than the outflow. In that case, it indicates that the business is overspending and unnecessarily accumulating inventories or paying their employees significantly more than the output they produce. Poor cash inflows lead to loan application rejection or a higher SME loan interest rate.

    Business Type

    Your business must be such that it does not rely on a specific season or occasion to drive sales. Furthermore, you must not engage in any business that involves trading with a foreign nation. Aside from that, numerous lenders have explicitly mentioned which sectors they serve on their website’s product pages.

    Business Plan

    The lender may want you to provide a business layout if you seek a significant loan. This document outlines how you want to use the cash, the annual turnover you anticipate for the next 3-4 years, in-depth details about your management team and their previous experience, and other business-related elements. The more impressive your business plan is on paper, the more likely it will be approved.

    Ways to Use SME Loans in India

    There are different types of SME loans in India, such as working capital loans, term loans, and business overdrafts. Some are versatile, while others are available for specific purposes. Here are some of the best ways to utilise funds.

    1. Expanding Business

    Let’s illustrate this with an example. Assume you own a well-established clothing company that specialises in school uniform manufacture. However, in your location, the demand for traditional clothing is high. You can use this loan to grow your apparel firm into a new segment in this situation.

    However, remember that if you are a startup with little or no experience, you may need to rely on alternative funding sources to help your firm grow. You can use equity investors or rely on government finance like Mudra loans.

    2. Buying Plant & Machinery

    Have you ever considered how much heavy equipment placed in manufacturing facilities or factories costs? The answer is lakhs of rupees, maybe crores.

    Suppose you, as a business owner, want to fund the complete machinery with your company’s revenue. In that case, you may fail to satisfy other business commitments, such as paying employee salaries or purchasing raw materials. Here’s where SME loans come in.

    3. Hiring Staff

    If you are expanding your business, the foremost investment you need to make is expanding your sales and tech team. This requires significant funding, which you can obtain through SME business loans.


    SME loans are great financial tools to help your business flourish. However, before deciding on the ideal type of SME loan in India, you should thoroughly research various lenders’ offers, interest rates, and eligibility. To make the most of your borrowing, use funding wisely and avoid putting money in those areas of business that have no role in improving your company’s revenue.