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Difference Between SME Loans And Business Loans

mahindra-finance-author

by Mahindra Finance

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April 11, 2024

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5 mins read

Running a successful business requires business finance or capital, and one of the most common ways to finance a small or medium-sized enterprise (SME) is through loans such as SME business loans. However, the world of business finance can be overwhelming, with various options available in India. Two popular choices are business loans and SME loans. If you are looking for business loan meaning, reading this article will provide you with the information and the differences it has with SME loans. It will help you decide which one makes sense for your business.

Business loan in India

Business loans primarily cater to established businesses that require financing for various needs such as launching new products, expanding operations, purchasing equipment, or hiring new employees. These loans can be short-term or long-term depending on your business requirements. Additionally, taking a business loan and repaying it responsibly can help establish a good credit history for future financial needs.

What is SME loan?

SME loans are designed to support small and medium-sized businesses in their expansion or daily operational needs. Whether buying equipment or inventory, increasing working capital, marketing activities, or hiring fresh talent – an SME loan can provide the necessary funds. Compared to business loans, SME loans typically require less documentation and have more relaxed eligibility criteria.

The differences: Business loans vs SME loans

To make an informed decision about which type of loan is right for your business, let's compare some key factors:

1. Eligibility criteria

Business Loan: Banks often impose stringent eligibility criteria for business loans. They typically require a good credit history and a proven track record of profitability. Documentation requirements can be extensive, including financial statements, income tax returns, and property deeds

SME Loan: In contrast, SME loans have more lenient eligibility criteria. Banks understand that small businesses may not always have a long operating history or extensive financial documentation. Generally, banks consider the minimum operation of 3 years, audited financials showing a turnover of ₹4 lakhs, and GST documentation along with KYC documents and bank statements for the business.

2. Credit history and collateral

Business Loan: Banks usually require a good credit history and collateral when granting business loans. This can be challenging for small companies or startups with limited assets or credit records.

SME Loan: On the other hand, SME loans do not typically require collateral or submission of credit history. This provides security for budding entrepreneurs who may not have substantial assets to pledge as collateral.

3. Interest rates

Business Loan: Business loan interest rates tend to be higher, ranging from 12-24%. These rates are influenced by factors such as creditworthiness, tenure, and the size of the loan.

SME Loan: SME loan interest rates are generally lower than business loans, typically ranging from 0.55-3%.

4. Loan amounts

Business Loan: Business loans typically offer larger loan amounts, starting from ₹20 lakh and going up to several crores. These higher loan amounts are suitable for businesses with substantial expansion plans or investment needs.

SME Loan: SME loans are more suitable for smaller financing needs, ranging from ₹1-20 lakh. These loans cater to the financial requirements of small and medium enterprises without burdening them with excessive debt.

Conclusion

Now, you know what is SME loan and how it differs from a business loan in India. Understanding the true business loan meaning and its differences from SME loans is crucial when deciding on the best financing option for your small or medium-sized enterprise. While business loans cater to established businesses with larger financial needs, SME loans are designed to support smaller enterprises at different stages of growth.

If you're ready to take the next step in growing your business, consider exploring options with Mahindra Finance. Their expertise in providing tailored financial solutions to rural and semi-urban India can help you find a suitable loan product that aligns with your business goals.

FAQs

Q: What is the meaning of a business loan?

A business loan is a financial product offered by banks or financial institutions specifically tailored for established businesses looking to finance various needs such as expansion, equipment purchases, or hiring new employees.

Q: What is the difference between business finance and SME finance?

Business finance refers to the financial management and funding of a business, including various financial products such as loans, equity investments, or lines of credit. SME finance specifically focuses on financial solutions for small and medium-sized enterprises.

Q: What is an SME business loan?

An SME business loan is a type of financing specifically designed for small and medium-sized businesses. These loans provide funds for various purposes such as purchasing equipment, increasing working capital, or hiring new talent.

Q: What is the meaning of an SME loan?

An SME loan is a financial product that caters to the specific needs of small and medium-sized enterprises. It offers funding options for various purposes such as operations, marketing, purchasing inventory, or expanding the business.

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