Small Business Loan
Banks offer various types of business loans targeted at SME customers for managing their working capital and other business funding requirements.
These loans are designed keeping in mind various situations in which a SME may require financing such as to buy machinery and raw material,
meet their working capital requirements and/or buy other fixed assets.
Banks in India offer varied funded and non funded banking facilities and loans to meet the business
requirements of SMEs with respect to credit, banking transactions and taking counter-party transactions.
Popular SME products and services offered by majority of the banks in India:
Working Capital Loan:
Banks offer various fund based and non fund based working capital facilities to SME customers to assist them in
funding their daily operations. Some of the popular SME working capital loan products are:
Current Account with overdraft facility
Cash Credit facility
Bills Discounting
Short Term Unsecured Business Loans
Loans under the CGTMSE scheme
Guarantees
Letter of Credit
Term Loan:
Banks also extend fund based facilities to SMEs for the purpose of capacity expansion,
capital expenditure and for buying fixed assets.
Some of the popular SME term loan products are:
Secured Term Loan
Loans for purchasing construction equipment or commercial vehicles
Working Capital Loan
Current Account with Overdraft
You open a current account with your bank to manage your daily banking transactions.
You are allowed to withdraw and deposit money from the current account as and when
funds are available thus allowing enterprises to manage their short term working capital
requirements on an ongoing basis. Banks also offer an overdraft facility on your current
account to allow you to over-draw up to a certain limit and hence help you meet any short term mismatches in your working capital finances.
Current account overdraft facility key features
Current Account is a flexible account which allows limitless transactions.
Transactions up to a pre-specified limit are free and additional transactions above the free limit are charged
No interest is paid on balances in current account
Minimum balance requirements of current account are higher than saving account due to higher transaction frequency on the account
You can also avail an overdraft facility on your current account which allows you to overdraw up to a certain limit occasionally.
You are charged only on the utilized amount and not on the sanctioned amount
Current account overdraft eligibility
MSMEs with a turnover of more than Rs 30 lakh to upto Rs 3 crore. Banks may have different internal definitions of MSMEs
Business Vintage of minimum three years
Who should opt for Current Account Facility?
You have frequent transactions which means frequent deposits and withdrawals from your bank account
You require regular banking facilities for payments, cash management, processing etc
You want to build a history of your banking transactions which enables you to avail credit on easy terms in the future
Cash Credit Loan
A SME enterprise can avail a cash credit facility with a pre-approved limit to manage its seasonal,
urgent and unplanned working capital financing requirements. SMEs are allowed to borrow and repay
within a pre-approved limit thus allowing them to meet short term working capital loan requirements on an ongoing basis.
The SMEs can utilize the funds withdrawn for business purposes such as purchasing raw material, power and fuel, buying stocks etc.
Cash Credit facility key features
Cash Credit facility is similar to overdraft facility on current account as it provides an option to draw balance over &
above the balance available in the current account within a pre-approved credit limit
Banks ascertain and sanction credit limit eligibility based on an assessment of working capital requirement.
The banks conduct an analysis of the last three years financial statements to determine the credit limit
The SME is allowed to continuously borrow, withdraw and deposit under a cash credit facility thus meeting its working capital financing requirements
Short term working capital credit where the limit is sanctioned and renewed on an annual basis
Key Eligibility Criteria for Cash Credit facility
MSMEs with a turnover of more than Rs 30 lakh to upto Rs 3 crore. Banks may have different internal definitions of MSMEs
Business Vintage of minimum three years
Banks seek stocks of raw materials, work-in-progress and finished goods as collateral for cash credit loans
Why should a SME opt for Cash Credit Facility?
An overdraft or a cash credit facility is useful tool for meeting the working capital financing requirements of SMEs as it allows:
To hedge against a situation of temporary or seasonal mismatches in cash flow
To ensure that no cheques issued by it are returned due to insufficient balance in your current account
To minimize their interest cost as they pay interest on only the amount actually
drawn and not on the sanctioned limit and the interest is calculated on a daily basis
Unlike other loan products which are repaid in installment, there is no fixed installment repayment schedule in a
Cash Credit Account and one can repay as and when funds are available
Overdraft Vs Cash Credit
While cash credit and an overdraft limit operate similarly, there are some basic technical differences between the two
Cash Credit Facility
Overdraft Facility
Account requirement
You will be required to open separate Cash Credit Account with bank to avail CC Facility
You can avail overdraft facility on your existing current Account .
Security
Current Assets like Inventory & receivable are usually taken as security for allowing CC Facility
Cash Equivalent like shares, FD’s Insurance policy are taken as security. The facility can be unsecured for up to a certain amount
Length of Credit Period
Limit allowed for a period of 1 year & renewed every year
Very Short duration – but can be up to 1 year
Frequency of overdraw
Unlimited with free transactions allowed up to a particular number
Restricted to a few times
Interest Rate
12 - 19%
14 - 20%
Bills Discounting
If your business runs on credit and bills receivable constitute a significant proportion of your current advances or working capital,
then you have the option to discount your bills receivable with banks and release liquidity. Banks typically accept bills drawn by you
on your customers and pay you immediately after deducting some commission or discount.
The Bank presents the Bill to the borrower's customer on the due date of the Bill (End of tenure) and collects the total amount from your customers.
Key Features of Bills discounting
Facility is offered for 3 - 6 months depending on tenor of bill
Rate of discount depends on short term interest rate of banks for SMEs
An LTV of 80% is applied on the value of bills discounted
SMEs with minimum three years of business vintage are eligible for the facility
Eligibility and interest rate for bills discounting is also based on your credit worthiness and an evaluation of your last three years financial performance
Banks also take into consideration the credit worthiness of your debtors (drawee of the bills)
and typically prefer discounting bills issued by reputed and large corporate
Types of Bills Discounting
Clean bill discounting – Clean bills discounting is offered on bill of exchanges issued by credit worthy customers and hence,
require no supporting documents in addition to the Bill of Exchanges. Clean Bills Discounting can be availed by SMEs that supply to large,
reputed and credit - worthy corporate.
Bill discounting against LC – Banks also provide any option of discounting a SMEs LC backed bills receivables. The discounted trade bills are typically backed by irrevocable Letter of credit, granted by any Commercial Bank of India
Why should a SME opt for Bill Discounting
Provides instant liquidity and working capital financing against your credit sales
You are not required to offer any collateral in the form of fixed assets and stock
Attractive rate of interest, if the customer (Drawee) is a large reputed corporate with a strong credit track record
Low documentation, quick processing and hassle free loan product
Short Term Unsecured Loans in India
While your day to day working capital financing may be met with the common working capital loans offered by banks such as a cash credit facility or an overdraft,
there may be certain occasions where you need short term finance to meet some unplanned expenditure required to grow your business.
Banks offer short term unsecured loans to meet your short term finance requirements of up to 1 - 3 years
Key Features of Unsecured Business Loans
Loan amount can range from Rs. 5 lakh – Rs. 1 Crore
Banks generally charge floating interest rate of 14% - 22% depending on various factors, such as your credit worthiness & present and future financial stability
Generally the loan tenure is from 1 - 3 years, but some banks offer up to 5 years in selected cases
These loans are collateral free loans and based on an assessment of past credit history, business vintage and financial performance
Eligibility Criteria for Unsecured Business Loans
SME with business track record of past 3 years and Minimum turnover of Rs 25 lakh with profit of minimum 1 lakh
Strong CIBIL report and track record
Detailed assessment of credit history, banking code of conduct, business strength, financial performance and management reputation
Why should a SME opt for Unsecured Business Loan?
You are unable to or not willing to provide a collateral or security such as property or deposit
You need money for a relatively shorter period of time
You need the money real fast and with minimal documentation within 3 - 15 days
You need flexible eligibility norms based on annual turnover or cash profits as opposed to reported income or profits
CGTMSE scheme
Credit Guarantee Fund Trust for Micro and Small Enterprises scheme has been launched by Ministry of Micro,
Small and Medium Enterprises to guarantee loans extended by commercial banks to micro and small enterprises (MSEs).
Under the schemes, existing or new MSEs are eligible to get Collateral free loans up to Rs. 1 Crore backed by a guarantee provided by CGTMSE.
Key Features of CGTMSE scheme
Annual Guarantee Fee of 0.75% - 1 %
Banks can make charge on assets bought by the loan amount
Guarantee coverage is up to 75% of the credit facility up to Rs 50 lakh and is 50% for credit facility of Rs 50 lakh to 1 crore
Credit guarantee cover can be higher at 85% for micro enterprises up to Rs 5 lakh, women oriented enterprises and enterprises
belonging to North East region
Some of the banks providing loans under CGTMSE Scheme are – SBI, ICICI Bank, HDFC Bank, Axis Bank, etc
Eligibility criteria for CGTMSE scheme
Sole Proprietorship Firms, Partnership Firms, Private limited Companies, Public limited Companies
Manufacturing or service based micro and small enterprises are eligible excluding Retail traders,
educational institutions, training institutions, agriculture & Self Help Groups
Why should a SME opt for CGTMSE Scheme?
It allows you to secure a loan without a collateral to offer
If you are Women, Micro Enterprises or units in North Eastern Region (including Sikkim),
then you get a higher guarantee coverage with lower guarantee fees
It helps you to borrow at lower rate of returns compared to that on a secured loan
Bank Guarantee
Larger organizations while entering into a working contract with SMEs look for additional
comfort on the financial strength of SMEs and their ability to honor the contracts. To meet this requirement,
Banks provide a guarantee on your behalf to third parties like government, quasi government and corporates.
This guarantee is an assurance from the bank to pay a certain sum of money, to the third party (beneficiary), if in case you fail to perform a contract.
Key Features of Bank Guarantee
Valid for a specified time period and for a specified amount (which might be certain percentage of total amount of contract)
Security or collateral required by banks for issuing bank guarantee
The event under which guarantee can be enforced is also clearly stated
Eligibility criteria for bank guarantee
SME with Annual turnover between Rs. 7.5cr. & Rs. 200cr
Positive TNW and PAT for 2 years
Three years of business vintage
Clean Credit history : Not listed in RBI Defaulter's List, CIBIL database
Group concerns not listed in RBI / CIBIL / Internal database of the Bank
Why should a SME opt for Letter of Bank Guarantee?
Increases your credit worthiness –Banks grant you guarantee after an in - depth analysis of your financials. Hence,
a Bank Guarantee certify your business soundness and increases your credibility
Helps in achieving third party confidence & smooth business functioning
Letter of Credit
A letter of credit is an assurance by a bank to pay one party on behalf of another party.
At your request the bank will issue a letter of credit to your seller or supplier,
guaranteeing payment against the supplies or raw material sold by the vendor to you.
The letter of Credit will be honored under instructions of the parties,
if the supplier has compiled with the condition regarding quality, quantity, price, date of dispatch, etc.
Letter of Credit is mostly used in international trade. If you are an importer, and have to deal with unknown foreign suppliers,
then they will require payment assurance for doing a business transaction with you. Banks will help you to procure goods at a cheaper rate and at easy terms.
Letter of Credit can also be used in cases when you (SME) are in business that frequently deals with large corporate.
In this case, Letter of Credit will prove your credit worthiness to the large corporate
Key Features of Letter of Credit:
Globally accepted
Can be transferred by the beneficiary
A certain amount of Fee is charged on Letter of Credit. The amount of fee depends on number of factors and is different in different banks
There are two types of LC - Revocable & Irrevocable LC
Revocable LC – You or your bank can amend or cancel the LC any time without informing the seller (beneficiary).
This type of LC provides no protection to seller
Irrevocable LC – This type of letter of credit cannot be changed or cancelled without permission from everybody involved
Key Eligibility Criteria for Letter of Credit
Positive TNW and PAT for 2 years
Three years of business vintage
Clean Credit history : Not listed in RBI Defaulter's List, CIBIL database
Group concerns not listed in RBI / CIBIL / Internal database of the Bank
Why should a SME opt for Letter of Credit?
This helps you to procure goods from international market at easier & convenient terms
You can explore new business opportunities as your risk of default is completely removed
Term Loan
Secured Term Loan
You can avail Term Loans facility for the purpose of capacity expansion,
capital expenditure and for buying fixed assets. Banks may a create charge on the fixed assets that are bought by the loan amount.
Banks may also require a collateral security, for granting a secured term loan. Loans against the collateral of residential,
commercial or industrial property are the most popular secured term loans for SMEs.
Key Features of Secured Term Loans
Typical loan tenure of 5 - 7 years. Some banks also offer loans of up to 10 years
Attractive interest rates of 10 - 12 % due to secured nature of lending
Variable rate of interest
Loans available for significantly high ticket sizes of Rs 20 - 30 crore as well
Banks also provide an overdraft facility on your secured term loans
Flexible repayment options are also available
Key Eligibility Criteria for Secured Term Loan
SME with business track record of past 3 years
Positive Turnover growth and PAT for 2 years
Strong CIBIL report and track record
Detailed assessment of credit history, banking code of conduct, business strength, financial performance and management reputation
Why should a SME opt for Secured Business Loan?
You are looking to take a loan for a relatively long period of time
You want to minimize your interest expenses
You have a property which you are willing to provide as collateral
Your loan amount requirement is high and hence, banks will not be willing to take an unsecured risk exposure on this amount
Construction Equipment Loan
If you are an infrastructure or a construction company, you may avail a Construction Equipment
Loan to finance the purchase of construction equipment against the hypothecation of the equipment purchased.
A wide range of construction equipment which are manufactured by large reputed firms such as L&T, Komatsu,
Caterpillar are financed by several banks and NBFCs. A few of the popular equipments that are financed by lenders include excavators,
tipper/ dumpers, transit mixers, cranes (Pick N Carry, Heavy Duty, Tower & Derrick), wheel loaders, compactors, road rollers, pavers etc.
Key Features of Construction Equipment Loans
LTV of up to 90 - 95% of the value of the invoice of the equipment
Eligibility of the borrower based on his income and repayment capacity
This loan is typically available for a period of 3 - 5 years
Requires a hypothecation/ charge to be created on the purchased equipment in favor of the bank
Interest rate in the range of 13% to 16 %, typically fixed rate,
depending on the profile and credit assessment of the borrower
Ticket size may range from Rs 20 lakh to up to Rs 20 - 25 crore
Some lenders may require the borrower to have a co-applicant and/or guarantor for availing a construction equipment loan
Key Eligibility Criteria for Construction Equipment Loan
Individuals, Self Proprietorship firm, partnership firms, public and private limited companies with more than 2 - 3 years of business experience
Existing owner of construction equipment
Applicants using equipment for self purpose, mine owners and contractors, plant hires
Commercial Vehicles Loan
SMEs operating as transport operators or in businesses engaged in logistics can explore the option of taking commercial
vehicles on loan from banks. Loans for purchase of commercial vehicles are available against the hypothecation of the purchased vehicle.
Loans are also available for purchasing used commercial vehicles
though the terms of the loan are slightly different from that of the new commercial vehicles.
Commercial Vehicle Loans are available for all types of vehicles include Light Commercial Vehicles, Medium Commercial Vehicles and Heavy Commercial Vehicles from all leading manufacturers including Tata Motors, Eicher Motors, Volvo, Mahindra Navistar, MAN, AMW, Mahindra & Mahindra, Swaraj Mazda, Bajaj Tempo, Ashok Leyland, etc
Key Features of Commercial Vehicle Loans
LTV of up to 90 - 95% of the value of the invoice of the equipment
Eligibility of the borrower based on his income and repayment capacity
This loan is typically available for a period of 3 - 5 years
Requires a hypothecation/ charge to be created on the purchased commercial vehicle in favor of the bank
Interest rate in the range of 12 - 18% which is typically on a fixed rate of interest
Refinance/top up loans on your owned commercial vehicle can also be availed for investment in businesses
Balance Transfer facility on Commercial Vehicles is also available
Some banks also offer financing for purchasing used vehicles at interest rates ranging from 12 - 22%
Why should a SME opt for Commercial Vehicle Loan?
Customized loan suitable for transport operators and SMEs operating in the logistics industry
Large number of banks and NBFCs have a focus on the segment and hence interest rates offered are competitive
No need to offer any property or other asset as collateral and detailed income proofs
