5 Things You Need to Know About an SME Loan Agreement

Small and medium enterprises (SMEs) make significant contributions to the country’s manufacturing and exports. Additionally, these enterprises employ millions of people and contribute to the Indian Gross Domestic Product (GDP). Classification of SMEs is as below:

Investment Turnover
Small Enterprises INR 1 crore – INR 10 crore INR 5 crore – INR 50 crore
Medium Enterprises INR 10 crore – INR 20 crore INR 50 crore – INR 100 crore

The government provides several incentives for the development of SMEs. Financial institutions also offer beneficial SME loans to enable such enterprises to grow further and expand their operations.

SME loans

Such loans are available for SMEs to meet their short-term and long-term funding requirements. Until recently, SMEs were unable to grow their businesses due to a lack of access to formal credit facilities. Institutional loans now help SMEs to overcome financial crunches so that they can focus on growing their businesses.

As with other types of loans, you will have to meet the SME loan eligibility norms, which are listed on the institutions’ websites. Most financial institutions provide different types of loans to meet the specific needs of your business.

Applying for a SME loan to build your SME can be useful. However, before signing on the dotted line, you need to check the loan agreement to ensure that there are no clauses that may become problematic later.

  • Collateral 

SME finance is secured, and you will need to either pledge some assets or provide a personal guarantee as collateral. It is advisable to offer stable security, which does not fluctuate based on market movements.

  • Interest rates

SME loan interest rates may be fixed or variable. You must understand these two types of rates and choose one that appropriately suits your business and its requirements.

  • Penalty 

The lender will levy some penalty if you delay or default on the repayment of your loan. Often, the penalty is defined in the loan agreement. So, you need to read this clause before signing the document.

  • Prepayment charges

If you decide to prepay the loan, some institutions may not levy prepayment charges while others may impose the same. While no prepayment charges are ideal, read the document carefully to make the right decision.

  • Loan documents

The SME loan documents are often listed in the agreement, and you should check these before applying for finance. This will help you save time and quicken the process.

You can visit the Mahindra Finance website to know more about SME loans solutions and apply for one!

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