Summary: Supporting new entrepreneurs is crucial to growing an economy. Therefore, making SME and start-up loans are extremely important today. This article discusses its benefits, eligibilities, and differences.

Small businesses and start-ups are a crucial part of the economy. To help start-ups and small and medium enterprises fulfil their funding needs, many financial institutions offer loans that specifically adhere to their needs.

For small and medium enterprises, there are SME loans. Similarly, there are certain loans offered by financial institutions that only cater to start-ups. While they might seem similar, there are quite a few differences between them, which will be discussed below. 

Start-up Loan

Benefits of a Start-up Business Loan

Apart from the general advantage of these loans, which is to fund an up-and-coming business, there are several other benefits. These include:

  • It does not call for equity dilution 
  • The return rate towards the bank is nominal, and a fixed interest rate
  • Banks are much easier to approach in comparison to other lenders such as venture capitalists 
  • The system for processing is well laid out, which lowers sanction periods 
  • Borrowers are not answerable to the bank about losses or profits they make

The above-mentioned benefits are perfect for any start-up. It gives them a lot of leeways to expand their business without any pressure. 

Eligibility Criteria 

Applying for a start-up business loan is very simple and requires some basic conditions to be fulfilled to be eligible. These are: 

  • Applicant must have a business plan
  • Start-up should be formed as a:
    • Sole proprietorship
    • Partnership firm
    • Private or public limited company
    • Limited liability partnership (LLP)
  • A credit score of 750 and above is a must 
  • Applicant should not have prior loan defaults 
  • The firm’s turnover should not exceed Rs. 25 crores

Fulfilling this criterion is the first step in availing funds for your start-up. Make sure to check your lender’s website for the same. 

SME Business Loan

Benefits of an SME Loan

Since SME business loans have a criterion that small businesses can meet easily, they come with various benefits attached. Some of these include: 

  • SME business loans are mostly unsecured; they do not require collateral
  • Basic proof of business documents will suffice (evidence of property/assets not required)
  • Interest rates are decided based on the scale of the business and its repayment ability 
  • SME business loans have flexible repayment tenures 
  • Most SME loans do not have a prepayment penalty
  • They waive off the penalty on the borrower for disbursing the loan earlier than the assured tenure. 

These benefits perfectly portray how convenient it can be to take SME loans which can help them fund the expansion of the business.

Eligibility Criteria 

Applying for an SME business loan comprises a simple process to be eligible. These are: 

  • The loan should be for business requirements, such as:
    • Purchasing machinery/raw materials 
    • Availing working capital
    • Marketing 
    • Expanding workforce or product line 
    • Entering a new location
  • Applicants must be between 25-55 years old
  • Business experience of 3 years (minimum) is required
  • Business income tax returns of a year (minimum) are required

Key Differences Between the Two

Both these loans, as detailed above, have the same overarching aim, which is to support start-ups and small & medium enterprises through means of funding. Although they are similar in their purpose, certain differences set them apart. These differences are:

  • Loans for SMEs range from Rs. 1 lakh to Rs. 50 lakh. On the other hand, loans for start-ups can go up to Rs. 5 crores. 
  • Interest rates for SME business loans are between 18 to 24%, and the interest rate for start-up business loans is 15% onwards. 
  • The repayment tenure for loans to SMEs is 12 to 36 months, whereas, for start-ups, it is 6 months to 4 years. 

Keeping these distinctions in mind is important before applying for a loan to ensure there is no confusion.

Both these loans can help you jumpstart your business. Start the process now and choose a lender that offers competent interest rates, flexible repayment options and boosts your business!