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Top Things To Know About An SME Loan Agreement


by Mahindra Finance


April 11, 2024


5 mins read

Running a successful business requires adequate financing. However, for many individuals, accessing funds can be a challenge. This is where SME loans come into play. One has to sign a business loan agreement after getting a loan. So, what is a business loan agreement? A business loan agreement is a crucial document that outlines the terms and conditions of borrowing money for your enterprise. However, understanding the complex jargon and legalities can be daunting. This article will simplify key concepts related to an SME loan agreement to help you make informed decisions.

1. Fixed or variable interest rate

When applying for a business loan, one of the most critical decisions is choosing between a fixed or variable interest rate. A fixed rate means that the interest remains constant throughout the loan tenure, whereas a variable rate fluctuates based on market conditions. Let's understand this better with an example:

Suppose you take out a ₹10 lakh loan at a fixed interest rate of 10% per annum for five years. This means that regardless of market fluctuations, you will pay ₹2 lakh as interest annually for five years.

On the other hand, if you opt for a variable interest rate of 8% per annum, your interest payments may vary yearly based on prevailing market rates.

It's important to assess your financial situation and choose the type of interest rate that suits your needs best.

2. Prepayment penalty

Another crucial aspect to consider is the prepayment penalty associated with your SME loan agreement. Some lenders charge fees if you decide to repay the loan before its tenure ends. It's ideal to choose a loan with no prepayment fees. However, even if there is a penalty, weigh it against the regular EMIs using a business loan EMI calculator to make an informed decision. Know the business loan terms when you apply for a loan.

For instance, let's say you have a ₹5 lakh loan with an interest rate of 12% per annum for five years. If you decide to prepay after three years, the lender imposes a 2% penalty on the outstanding amount. Using an EMI calculator, you can compare the remaining EMIs with the pre-closure fees to determine the most cost-effective option.

3. Security cover

When availing an SME loan, lenders often require borrowers to provide security against the loan. This can be in the form of assets or personal guarantees. It's advisable to use stable forms of security that are less likely to devalue during market downturns. In some cases, lenders may also ask for additional security if there is a decline in the value of your assets. Alternatively, you can opt for an unsecured loan; however, this may come with higher interest rates.

Let's consider an example: You own property worth ₹50 lakhs and wish to secure a ₹25 lakh business loan against it. In this case, your property serves as collateral and ensures that the lender has recourse if you default on your payments.

4. Penalty charges

Failure to repay your MSME loan on time may result in penalty charges imposed by the lender. Each financial institution has its criteria for determining these penalties in case of default. It's crucial to check and understand these charges mentioned in the loan agreement to avoid any surprises.For example, imagine you have taken out a ₹20 lakh business loan at an interest rate of 15% per annum for ten years. If you miss an EMI payment, the lender may charge a penalty fee based on their predetermined criteria and terms mentioned in your loan agreement. It is where knowing the business loan terms comes in handy for people.


Now that you know what is a business loan agreement, getting an SME loan can be a significant step towards growing your business. However, it's essential to understand the terms and conditions of the loan agreement before signing it. By considering factors such as interest rates, prepayment penalties, security cover, and penalty charges, you can make informed decisions. When applying for an SME loan, consider Mahindra Finance for a potential solution. Mahindra Finance offers user-friendly online application processes and competitive MSME business loan interest rates. Take the first step towards financial empowerment by exploring the offerings today.


Q: What is a business loan agreement?

A: A business loan agreement is a document that outlines the terms and conditions of borrowing money for business purposes. It includes details such as interest rates, repayment periods, and security requirements.

Q: Can I apply for a business loan online?

A: Yes, many lenders offer the convenience of online applications for business loans. Mahindra Finance provides an easy-to-use online platform for applying for MSME loans.

Q: How are MSME business loan interest rates determined?

A: MSME business loan interest rates can vary based on factors such as creditworthiness, market conditions, and the lender's policies. It's advisable to compare rates from different lenders before making a decision.

Q: What other terms should I be aware of in a business loan agreement?

A: Apart from interest rates and prepayment penalties, it's crucial to understand clauses related to repayment schedules, late payment charges, and default consequences.

Q: What are the business loan benefits?

A: The business loan benefits are aplenty. They provide entrepreneurs with the necessary funds to start or expand their businesses. They offer flexibility in terms of repayment options and often come with competitive interest rates.

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