The tech ecosystem and financial support of our country has been currently inviting a lot of budding entrepreneurs. The roadway to a successful business and the path of entrepreneurship requires a lot financial support at every stage in the journey. A plethora of options are available today for getting access to funds or loans based on the type of business, years of experience, and projected turnover. Funds are majorly required by start-ups for the purpose of establishment of their business and by SME or Small and Medium Enterprises in order to grow and expand their business, hence funding given for these enterprises also differs because of the difference in purpose of their borrowing.
There are different types of loans offered for Start-ups and Small Medium Enterprises which can be availed by the entrepreneurs are as follows:
- CASH/CREDIT OVERDRAFT
This facility is offered specially to SMEs for overcoming any shortage of cash which could arise because of lack of money for purchase of raw materials or paying utilities. The amount offered depends on business turnover and favourable collateral terms. This loan is provided to businesses having a turnover of more than Rs 30 lakhs. Banks also asks for stock of raw material or finished goods as collaterals. This facility ensures no overdraft of cheques and also minimizes the rate of interest as it is charged only on the amount of sum borrowed.
- TERM LOAN
Term loans are offered to Small and Medium Enterprises for expansion of businesses. This loan offers benefits of a flexible time period like short term loan, intermediate term loan, and long-term loan, along with it, it is also provided at an affordable rate of interest. Term loan is offered only to enterprises which have a successful proven CIBIL record and positive growth, PAT for 2 years. Term loan should be used when the amount to be availed is huge and also required for a longer time since it is the only loan which has lowest rates of interest. Enterprises avail this loan if they plan to invest in fixed assets, new building or any other such requirements in production process.
- BUSINESS INSTALLMENT LOAN
A business instalment loan is a type of loan that proposes a fixed amount and time and can be paid in instalments. This loan checks credibility of profits and documentation before availing a loan of higher amount. The benefit of this loan is it allows predicting business budget as it deducts only a fixed amount of charge every month. Early repayment of this loan in certain cases fines high interest rates. The most important thing to remember while availing this loan is accurately budgeting the amount needed as it does not allow to borrow more like the line of credit in case of need.
- FD BACKED LOAN
This is the easiest form of loan availability if the borrower or the promoter has a fixed deposit with the bank. The limit of the amount offered is up to 90 percent of the fixed deposit amount. This loan acts as a benefit for organizations which have not yet created a credit record and also offers low interest rate even when compare to the interest rates of personal loan.
Let’s understand the difference between Start-up Loans & SME Loans:
- LENDING AMOUNT
The financial support provided to a start-up is much more than an SME because a Start-up company requires fund from scratch to build up the empire whereas a Small Medium Enterprise requires fund for strengthening their existing business by either growth or expansion. The loan amount offered to a Start-up are up to Rs 5 Crores whereas loan amount offered to Small Medium Enterprises range from Rs 3 lakhs to Rs 75 lakhs.
- RATE OF INTEREST
The first factor in case of deciding the rate of interest is the amount borrowed and the period of time for which it is borrowed. In case of SME’s loans are offered at a interest rate of 18% to 24% whereas in case of Start-ups the rate of interest is higher since the risk factor is higher. Start-ups also get an additional benefit of wavering off of the interest rates for the first two years of starting their business.
- TIME PERIOD OF THE OFFERING
The loan tenure for a Small Medium Enterprise is anywhere between 12 months to 48 months based on the amount borrowed whereas the tenure for a start-up totally differs. Start-ups are offered loans in the form of line of credit or LC. Line of Credit means the amount is offered to Start-ups in form of credit card with a starting range to an upper cap limit being provided which may or may not be fully utilized based on their requirement as and when it comes with null interest being charged for the first 9 to 15 months.
- ELIGIBILTY CRITERIA
For a Start-up to receive loan it has to first qualify as a start-up under the Ministry of Commerce and Industry, Government of India. To qualify as a start-up, it must be first a registered entity not more than 7 years old and should have not crossed an annual turnover of Rs 25 crore in any financial year. For a SME to avail loan, first the borrower or the promoter has to be in the age group of 25 to 65 years. Secondly, a record of tax filing proving profitability for 3 years and they also need to provide a proof of business growth. It also requires positive figures of PAT (Profit after tax) and a good credit score rating.
The country is realizing the potential of small and medium businesses and so are the banks. Today the different types of loans offered, rates offered etc are done so as to support upcoming businesses and ultimately improve the economic strength of the county and its people. The banks are also doing their best to offer these facilities with minimum documentation and maximum ease of access by providing online and mobile banking facilities. Business owners should analyse their financial needs appropriately, recognize the different loan offerings and identify their pros and cons before availing them.