What are the Different Types of SME Loan Interest Rates in India?

There are several types of loans available in the market designed for various purposes and customer segments. But when it comes to business loans especially for the small and medium businesses, then SME (Small and Medium Enterprises) loans hold the top position for their range of attractive features and benefits, one of them being affordable SME loan interest rates.

What are the Top Differences between SME Loans and Other Loans?

  • Unlike other loans, financing for SMEs are easy to avail and come with comparatively low SME loan interest rates. Many lending institutions require simple documentation to provide general funding to businesses, for instance, a list of directors, IT returns, deeds of assets owned by the business, etc. However, the documentation for an SME loan is straightforward. Lending institutions may only ask for GST documentation, tax returns, KYC documents, and bank statements related to the business for an SME loan.
  • SME loans are typically collateral-free loans, offered along with subsidies to encourage small enterprises to expand their business. Contrarily, other loans for businesses can be secured and unsecured loans, depending upon the necessity of the venture.

Types of SME Loans to Look Out For

The common SME loans you can easily avail include the following.

  • Secured loans
  • Term loans
  • Asset-based loans
  • Overdraft credit facility
  • Working capital loans

Factors that Affect Interest Rates on SME Loans

  1. Business type

The credit policies of each loan provider in India vary. All the loan providers consider certain types of business and industries to extend funding. The lender will definitely consider the sort of company before approving finance. The cost of the loan is usually high if the company or industry is known as high-risk by the lender.

  1. Type of loan

The type of loan a business seeks may impact the SME loan interest rates agreed on. For example, unsecured loans have actually a higher rate of interest in comparison to secured loans for SMEs.

It is basically because in the event of providing secured finance, the financial institution has the company’s collateral against the loan, which cuts down the overall risk of lending involved.

  1. Annual turnover

A high annual turnover for a company is helpful too in securing the best rates. Lenders usually consider it as a good indication since it improves the payment ability of the organisation as it can generate decent profits generally in most years.

But, if the annual turnover inconsistent or the company is running into losses for a long time, the application for the loan may get rejected or at most attract high rates.

The below-listed table indicates the possible SME loan interest rates based on the loan types available in the market:

Unsecured business term loan 9% – 12% p.a.
Temporary bridging loan 2.75% – 5% p.a.
SME working capital loan 3.75% – 6% p.a
Trade financing line 6% – 8% p.a.
Factoring/receivables financing 6% – 8% p.a.
Overdraft 10% – 13% p.a
Equipment/machinery loan 3% – 7% p.a.
Commercial/industrial property loan 2% – 3% p.a.
P2P crowd-funding 1% – 5% /month

To empower small and medium businesses in India, different lending institutions, like NBFCs, provide several types of loans at reasonably SME loan interest rates. Further, these financing options are made available at short notice as well through simple eligibility and document requirements.

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