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SME Loan Guide: Definition, Features, and Benefits

What is an SME Loan?

An SME loan is specifically designed for small and medium-sized enterprises (SMEs). These loans help businesses expand, invest in new equipment or machinery, or cover day-to-day operating costs.

For example, you are a small business owner that manufactures and sells furniture. You have been in business for a few years, but you would like to expand your operation by opening a new showroom in a different city. To do this, you might need an SME loan.

However, how does a SME business loan aid in a company’s expansion? Let’s explore the factors of MSME(Micro, small, and medium enterprises) loans that support future growth.

Features of SME Loan

In order to ensure that SMEs can continue to flourish, banks and financial institutions offer SME loans with a host of features that make them inviting and affordable.

Some of the key features include:

1. Flexible repayment plans:

SME loans usually come with flexible repayment terms. This makes it easier for SMEs, small and medium-sized enterprises, to repay the loan without putting a strain on their finances.

2. Competitive interest rates: 

Small business loans have low-interest rates, with some starting as low as 7.65% p.a., making them an affordable option for owners to consider.

3. Collateral-free: 

A collateral-free loan is a loan that does not require the business to put up its assets as collateral. 

Many lenders offer collateral-free loans making it easier for businesses to get access to the funding they need.

4. Speed and convenience: 

As a business owner, you must be worried about the time required to approve a loan. Applying for an SME loan is usually quick and convenient, and the turnaround time for loan approval is relatively fast. This helps businesses get the funding they need in a timely manner.

5. Online account access:

SME loans enable business owners to check account balances and manage EMI online with just a few clicks, eliminating the need to keep a stack of paper documents.

6. Easily manageable

SME loans are much smaller in size than traditional business loans, enabling entrepreneurs to successfully manage them with less hassle.

Benefits of SME Loans

1. Puts strategy into action

You can start working on your plans within days instead of waiting for weeks for SME business loan approval.

2. Let’s you control your business assets

One of the benefits is the loan is unsecured, which means that you don’t have to give any collateral if you can’t make the payments. The company merely works together with you to grow your business to new heights!

3. Improves the company’s capital management

It’s important to have a plan in place before you apply for a loan so that you know how you’ll put the bank’s money to use. Small business loans can help you if you want to upgrade your overall cash flow or plan to buy new equipment.

4. Helps you increase credibility in the market

By putting money into the appropriate strategies, MSME/SME loans help you increase your profitability. This builds trust and credibility among the customers. 

Moreover, credit rating agencies will upgrade your company’s credit standing by noticing these changes, facilitating more investment and financing for your business.

SME Loans Fees & Interest Rates

The details regarding loan fees and interest rates are as follows:

  • Interest rate is 7.65% p.a and above
  • Loan amounts begin at INR 50,000.
  • Loan tenure  may be extended for up to 15 years.
  • Processing charge is undefined and dependent on the lender

The above specifications may change depending on the lender.

Eligibility Criteria for SME Loans

To be accepted for an MSME loan, you must meet the eligibility requirements established by your lender. The specifications will change from bank to bank, but here are some general requirements:

1. There are two types of businesses to consider when discussing investment: Manufacturing and Services 

The following business size standards apply to the manufacturing sector:

Business SizeWorking capital
Micro<25 lakhs
Small<5 cr
Medium<10 cr

For the Service sector, the size of the business is as follows:

Business SizeWorking capital
Micro<10 lakhs
Small<2 cr
Medium<5 cr

2. A well-established company that has been operating for more than six months.

3. The company should not be on any blacklists or exclusion lists.

4. The businesses’ real estate shouldn’t be on the list of undesirable locations.

5. SME business loans are not applicable for Trusts, NGOs and charitable organisations.

Documents Required for anSME Loan

A few documents are necessary for an MSME/SME loan:

  1. Identity proof: Aadhar Card, PAN card, passport and voter id
  2. Business Evidence: business registration certificate.
  3. Financial statements: profit and loss statements and balance sheets. 
  4. Personal financial statements: personal income tax returns, sales TAX return 
  5. Security proof: Photocopies of the lease deeds/ title deeds.

3 simple steps to your SME Loans

  1. Fill out and submit the application form.
  2. Upload documents for verification.
  3. Get approval from the lender within a few days.

Smart ways to use SME loans

1. Inventory management

Keeping track of inventory is imperative to running a business. If you do not have enough of an item, it could tarnish your reputation and put your business at risk of losing clients. SME loans help you purchase equipment to manage the business easily.

2. Invest in equipment

A business will rely on machinery, equipment and tools to get it off the ground. Buying these items can be a big challenge for small businesses because they often cost a lot of money – but SME loans are specifically designed to meet this challenge! 

3. Easily manage the monthly budget

A business needs money to pay its staff and carry out day-to-day operational activities. This can increase the monthly budget leaving financial stress to handle for business owners. A small business can easily utilise SME loans and manage cash flow.

4. Finance marketing

Marketing helps businesses reach out to potential customers and convince them to buy their products or services. SME loans help companies market their products or services by financing the costs of marketing campaigns, hiring marketing professionals, and managing market research costs, which is essential for understanding the needs and wants of potential customers.

Calculating an SME Loan EMI

The following formula is used to calculate the EMI for SME Loans.

E = P x I x (1+I)m/(1+I)m-1


‘E’ – EMI

‘P’ – loan amount

‘I’ – monthly interest rate

‘m’ – loan’s term

Dos and Don’ts for the Online SME Application Form


  1. Check eligibility and the credit score before applying for an SME loan.
  2. Know the documents required, documents will vary depending on the type of loan and the lending institution. 
  3. Prepare a thorough business plan and have a clear understanding of your funding requirements.


  1. Don’t apply to multiple lenders because doing so will lower your credit score and turn away potential investors.
  2. Avoid defaulting on loans, making late payments, and having a history of poor credit.
  3. Pick a lender wisely – choose one that does not demand an upfront payment.

Frequently Asked Questions

What is the full form of SME loan?

The SME loan stands for Small and Medium Enterprises Loan. This loan is given to small and medium enterprises to help them grow and expand their businesses.

Are MSME and SME loans different?

MSME and SME are the same. Small and medium-sized enterprises that fall under this title are frequently abbreviated as SME.

What is the interest rate on an MSME loan?

The interest rates vary as per the lender and generally start from 7.65% p.a.

What are the benefits of an MSME loan?

MSME loans offer a number of benefits, including lower interest rates, longer repayment terms, preferential treatment in government procurement, helping you access working capital and expand your business.

Do I need to submit my income tax returns while applying for SME loan?

The document list depends upon the requirement specified by the lender. Though it is not mandatory, it is best to keep these documents handy to increase the chance of approval.

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