Difference Between SME Loans and Business Loans

Many businesses in India, no matter how big or small, often need financial aid to gain a competitive edge. If you run a small shop just around your block or care for an expanding company, getting the proper financial assistance is key to success. Two common options available are SME loans and business loans.

Both financial products come with essential capital and offer various terms, but they are designed to serve different types of businesses. Your choice can have a significant impact on your company’s development.

This article will break down the key differences between SME loans and business loans to help you make an informed decision.

Understanding SME Loans and Business Loans

SME Loans:

• These loans are meant for small and medium-sized businesses (SMEs) in India.
• This sector has favourable terms of financing offered by the loans.
• Lenders typically understand the unique challenges that SMEs face and offer solutions accordingly.

Business Loans:

• The loans are categorized as broad and fitting for many different types of business startups.
• These loans can also be used to expand your business and purchase equipment. This is a good option to opt for if you need bigger funds urgently.
• Most business loan lenders do not understand what goes on behind running an SME, and they come with strict lending conditions, steep interest rates on their loans, and lengthy approval processes.

Also read: All You Need to Know About a Business Loan

Key Differences Between SME Loans and Business Loans

Eligibility Requirements

• SME Loans: The eligibility criteria are usually more relaxed. Lenders often require minimal documentation, such as GST filings, bank statements, and basic KYC documents.
• Business Loans: These require a more robust financial history. Applicants often need to provide financial statements, income tax returns, and proof of business profitability.

Loan Amounts

• SME Loans: These loans typically offer smaller amounts, making them ideal for modest operational needs.
• Business Loans: These provide access to larger sums, which are suitable for significant investments or large-scale expansions.

Interest Rates

• SME Loans: Interest rates tend to be competitive to support small businesses, although they may vary depending on the lender.
• Business Loans: Interest rates may be higher, especially for larger loan amounts, reflecting the associated risks.

Collateral Requirements

• SME Loans: Many are unsecured, meaning no collateral is required. This is beneficial for small businesses without substantial assets.
• Business Loans: Often secured, requiring businesses to pledge assets as collateral.

Application and Processing Time

• SME Loans: The approval process is faster due to more straightforward documentation requirements.
• Business Loans: Approvals may take longer due to detailed evaluations.

Also Read: Eligibility and Documents Required for MSME Certification

Why SME Loans Are Critical for India’s Economy

The Indian government recognises the importance of SMEs and has introduced several business SME loans to support them. For example:

• MUDRA Loans (Pradhan Mantri Mudra Yojana): Provides up to INR 20 lakh for micro and small enterprises.
• Credit Guarantee Scheme for Micro and Small Enterprises (CGTMSE): Helps businesses secure loans without providing collateral.

Some Interesting Statistics to Look at:

• According to the fourth edition of CRIF High Mark's "How India Lends" report, India's MSME loan portfolio expanded by 17.8% in FY24, reaching INR 64.1 trillion.
• The same report reports that a total of 27.4 million MSME loans were sanctioned during the period, amounting to INR 54.2 trillion.

How to Choose the Right Loan

Consider these factors before applying for a loan:

• Business Size and Stage: SMEs can benefit from SME loans, while larger businesses might require standard business loans.
• Financial Health: Understand your company's creditworthiness and repayment capacity.
• Loan Purpose: Identify whether you need funds for a short-term operational need or a large investment.
• Collateral Availability: Decide if you're willing to pledge assets for the loan.

The Bottom Line

Choosing the right loan can be a game-changer for your business. SME loans are designed for small and medium enterprises with easier access and tailored benefits. On the other hand, business loans offer larger sums and can cater to bigger operational needs.

Evaluate your business requirements carefully and choose the best option for sustainable growth.

Apply for a business loan if you need financial assistance for your business. Secure the funding you need to grow and see your dreams materialize!

Moreover, if you need help sorting out your EMIs and figuring out how much you’ll be paying in the long run, try using an online EMI calculator. This free tool is easily available on the internet and can help you simplify your calculations and make them more accurate!

FAQs

Q.1. Are business loans and SME loans the same?

A. These two types of loans are different, as established in the above article. Business loans have a longer repayment term and higher interest rates. The application procedure for both loans is also different.

Q.2. What is the difference between an SME and a small business?

A. A Small-to-Medium Enterprise (SME) is the umbrella term used for small and medium enterprises. A small enterprise typically refers to companies with 100 employees or less, while a medium company has around 100 and 500 employees. However, this range differs from place to place.

Q.3. What are the three types of SMEs?

A. The three types of SMEs are Small enterprises, Medium enterprises and Micro enterprises. They are a significant source of nurturing entrepreneurial skills, innovation and employment.

Q.4. What is the limit of a small company?

A. Under Section 2(85) of the Companies Act 2013, a company qualifies as a small company if it has a paid-up share capital of up to INR 4 crore. It should also have an annual turnover of up to INR 40 crore. The amount for both can be higher but is capped at INR 100 crore.

Q.5. What is an example of an SME?

A. Examples of SMEs include legal firms, dental offices, bars, etc.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com.