Which type of Small Medium Enterprises (SME’s) should avail the facility of unsecured business loans?

Business financing needs vary from business to business. The finance by way of equity from a promoter’s capital is limited. Hence SME finance from external sources is a must. Out of the various debt options, the unsecured business loans are most suited for small business funding.

The Small and Medium enterprises industry contributes 45% to India’s manufacturing sector and a sizeable 40% to Indian exports. In other words, SME is a very important component of the Indian economy. The Reserve Bank of India (RBI) defines “SMEs as small-scale industrial unit, an undertaking in which investment in plant and machinery does not exceed Rs.1 crore, except in respect of certain specified items under hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods, where this investment limit has been enhanced to Rs. 5 crores”

 The following are types of SME finance that can be availed as unsecured business loans:

  1. Working capital
    A working capital loan is extended by fintech lenders to meet the short-term cash shortfall. This is taken to meet the daily, routine business expenditure for the conduct of business operations. A working capital loan is ideal to overcome the seasonal shortage of cash, irregular cash flow or to cater to the expense from a sudden business opportunity. A manufacturer, service provider, retailer/wholesaler or a trader engaged in imports/exports is eligible to apply for working capital loans. Working capital loans are generally provided with a tenure ranging from 6-12 months. The interest rates charged depend on the credit score of the business. New age fintech companies, provide collateral free loans. Types of the working capital loan include a business line of credit, cash credit/overdraft, Packing Credit and Post Shipment Finance. There are other modes of working capital loans, primarily for the export community, like Letter of Credit (LC). Recently the RBI has banned the Letter of Undertaking instrument.
  2. The Line of credit: In this case, a business has a certain amount of allocated funds that can be utilized in a rotating manner. It functions on similar lines like a credit card whereby one can utilize tranches of money from a certain limit, repay within the due date and pay interest. The interest rate on the line of credit is nominal but can increase in case of failure to pay within the stipulated time.
  3. Term loan
    These are long term debt, where a lump sum amount is disbursed towards capital expenditure. The tenure is fixed, with either a fixed or variable interest rate. Such loans appear in books of account on the liabilities side of the balance sheet as long term debt.
  4. Equipment financing
    These types of loans are extended to the manufacturing sector. Equipment are crucial for conduct and expansion of business operations. To purchase equipment, most financial institutions have specialized loan products to meet this need. The tenure is fixed.
  5. Invoice financing
    Invoice discounting and financing is gradually gaining popularity as a means to raise capital. This is an easy way for small businesses to obtain working capital. There is often a time lag between the raising of the invoice and the ultimate realization. One can approach a financial institution to provide a loan against the invoice from reputed customers. Generally, 80% of the invoice amount is given as a loan and the remaining 15% becomes due when the invoice is fully paid by the customer. The lender will deduct nominal charges like the processing fee and interest.
  6. Pradhan Mantri Mudra Yojana (PMMY)
    MUDRA is a scheme specifically focused on benefitting the MSME industry in the non-farm sector. The loans under this scheme, without collateral, is available under three products – depending on the stage of growth and funding needs of the enterprise.

    1. Shishu generally covers loans up to Rs 50,000
    2. Kishore between Rs. 50,000 to Rs.5,00,000
    3. Tarun covers loans between Rs 5,00,000 and up to Rs. 10,00,000.
  7. Stand Up India
    This scheme is aimed at benefitting the entrepreneurs from the Scheduled Caste (SC) or Scheduled Tribe (ST) and women borrower to set up a new venture.

There are several small business funding options offered by fintech companies at attractive interest rates for SMEs. One must select one best suited to business needs.