Last Updated on September 13, 2022 by azamqasim
A business runs on capital. A start-up business or an SME requires adequate means for the smooth functioning of everyday business activities. In some cases, companies may run short of finances and look for lenders to match their financial needs. The sum of money made available to a business that is paid back in monthly instalments called a Business Loan. Start-up and SME loan interest rates are available at lower rates for the beneficiary of the businesses that require immediate capital.
What is a Start-up and an SME Business?
– Start-up Business:
These businesses are the ones that have a turnover of fewer than ₹25 crores in a year and have been in existence for not more than seven years. Most start-ups have the quotient of innovation, development, or improvement of services, products, or processes. A start-up business can enjoy seamless online registration, a three-year tax holiday, quicker access to funds, and tax exemption while registering.
– SME Business:
Small and Medium-sized Enterprises are businesses with a turnover of ₹25 lakhs to ₹5crores in the case of small scale and ₹5crores to ₹10crores in the case of medium-scale organisations. These businesses enjoy government-aided programs, SEZ allocations, a regulatory MSME Act, and multiple financial aids from the government.
Difference between MSME and Start-up Loans:
– SME Loans:
The funds provided as loans for SME enterprises range from ₹1lakh to ₹50lakhs. They can help start a new SME business or expand an existing one. Existing enterprises must show proof of profit and stability in growth along with tax filing statements.
The enterprises can avail of loans from lenders at an SME loan interest rate ranging from 18-24%. The tenure for repayment of such loans ranges from one to four years. The interest rate is dependent on the business profile and account statement. Other factors also play a role in determining the interest rate. For example, a woman can get loans at comparatively lower interest rates if the entrepreneur is a woman.
– Start-up Loans:
Start-up loans are available for up to ₹5crores, most of which help finance day-to-day business activities and immediate working capital needs. For a business to be eligible for an SME loan, it must get recognition by government jurisdiction. These businesses must have good records of profitable turnover to qualify for such loans. Most loans for start-ups are available without collateral support. Lenders do not require collateral submission for businesses to get these loans. These loans may require 20% as a margin, whether for working capital or term loan.
A line of credit is a business loan made available to start-up businesses and acts more like a credit card. The credit limit utilization depends on your credit score. You must have a good turnover and clean credit records to get a reasonable credit limit. An added advantage of this credit is that the business is exempted from paying interest for 9 – 15 months. It helps firms concentrate more on the development and growth of the industry.
Even such credit limits do not require collateral. It gives ample time and worry-free finance that you can put to best use in business activities. After 9-15 months, the business gets entitled to pay interest and repay the loan. The rate of interest for this credit ranges between 8% and 20%. The interest rate applies only to the funds borrowed, not the total credit limit. The utilized credit limit is the only amount calculated for interest and not the entire credit eligible, just like in the case of a credit card. A Business Loan application online is a straightforward and user-friendly way of procuring a business loan.
Governments, private and PSU banks have given multiple offers and excellent platforms for start-up and SME businesses to flourish and develop. A company looking for a Business Loan must deeply analyse and validate the SME loan interest rate, processing charges, and any other hidden charges before choosing a lender.