If we could recall the classic anecdote about the race of the hare and the tortoise, we would realise the value of small yet steady steps. In a globalised world where everybody gets to participate in as many races as possible, the success mantra for a moderately well-off individual cannot but be this.
Thus, it does feel great to dream big and aspire to determine your fate without relying on the fate of a potential employer. However, one must never forget the importance of this caveat.
A small business, therefore, represents the potential of an individual or a firm. Its modest beginnings conceal its unbridled potential for generating both capital and confidence that enable a firm to grow larger each day.
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Finance Fundas for SME and Business loans
Both business and SME loans are ultimately capital requirements for commercial ventures, although there exists a fundamental distinction between the two. While business loans are designated as those which are taken to provide the working capital for start-ups or for starting a project, SME loans are typically those which facilitate the expansion of already existing enterprises in the Small and Medium Enterprises criteria.
The nature and scope of the business plan or the agenda involved determine the rates of interest in both cases.
Business Loan
A business loan is the breath of life for wistful individuals and firms with an idea to capitalise upon. Faster access to funds is the key priority here, and these loans can be disbursed through banks and other financial institutions.
Typically, a business loan could be invested in buying new machinery and tools, in the expansion of the existing structure and scope of the business through efficient marketing, or simply in gaining working capital in order to employ working personnel.
Loans on receivable accounts, Asset Finance, Credit Line, Equity Funding, and Short-Term Business Loans comprise the most important kinds of business loans.
Eligibility for a Business Loan
The eligibility for business loans is determined on the basis of the nature of the entity seeking the loan. In addition to this parameter, certain requirements need to be met by each of these entities in order to be eligible.
- ·For a self-employed professional to apply for business loans, the loan must possess the relevant qualifications and also have the requisite skills and abilities for the proposed venture. These terms differ in their particulars from bank to bank. Some examples of such individuals include doctors, engineers, Chartered Accountants, etc.
- For limited companies (private and otherwise), the eligibility to apply for a business loanupto Rs. 15 lakhs are determined by its annual turnover value, which must be greater than or equal to Rs. 1.5 lakhs minus taxes. In addition to this, the business should not have been blacklisted. It should have been fully functioning six months prior to the application.
- The profit and loss statements duly maintained are assessed by financial institutions for considering the eligibility of a proprietorship firm or a limited liability partnership. Apart from this, the conditions of not having been blacklisted and had been functioning 6 months prior to the loan application are also applicable in this case.
Documents Required
The testimonials and documents required to apply for a business loan could be broadly classified under three heads-
- ·Business documents such as Partnership deed, proof of incorporation of establishment certificate, PAN Card of the Company, and documents certifying registration.
- Financial documents which comprise IT returns for the previous 2 years, Profit and Loss records, Bank Balance for the past 6 months and VAT returns for the last couple of years.
- KYC documents such as two copies of passport-sized photographs, Voter ID, PAN Card, AADHAAR Card.
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SME Loans
The 55 million Small and Medium Enterprises of the country are the engines of the National and local economies. Employing a significant section of the working population, their access to finance is of fundamental importance.
The government has focussed quite fervently on the credit needs of these institutions, recognising their significance in creating a self-reliant nation. Various financial institutions, including private institutions and government organisations, offer varied loans to this sector that can range from 1 lakh to 1 crore depending on the business operations and proposals. Even the repayment period, which usually ranges between 12 and 36 months, is immune from the threats of foreclosures.
Typically, SME loans are used to enlarge the scope of small and medium businesses, including the buying of capital for warehouse operations, marketing charges, meeting overhead expenses, and the acquisition of new products.
The various products that are grouped in this category include Term Loan, Business-guarantee Loans, Asset-based Business Loans, POS Loans, Cash Credit Loans, Working Capital Loans, and the Pradhan Mantri Mudra Yojana.
Various monetary incentives have already been provided to this sector. If the loan amount does not cross a certain threshold, the banks usually do not seek collaterals, and the procedures for paperwork have also been made swifter and quicker. Besides, the flexibility of repayment offered by financial institutions makes it quite lucrative for businesses.
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Eligibility Criteria for SME loans
The various conditions of eligibility for SME loans are provided below:
- The age of the borrower should not be below 21 years of age and must not exceed 65 years of age at the time of loan application
- The minimum threshold of annual income for SMEs is pegged at Rs. 1.5 lakhs.
- Most banks generally agree upon another threshold for the determination of loan eligibility- the annual business turnover pegged at Rs. 40 lakhs.
- The business must have incurred consistent gains for two years prior to the application for the loan.
- The borrowers concerned should be in the same line of business for at least three years prior to the loan application.
Documents Required
The documents required for an SME loan application are not much different from the requirements for a business loan. The business documents include audited financials, proofs of incorporation and registration, and PAN card. The financial documents include profit and loss records, IT returns for the last 2 years, 6 months’ bank balance and last 2 years’ VAT returns. The principal KYC documents comprise passport-sized photographs, AADHAAR Card, Voter Card, and PAN.
Go Online or Get in line The procedure to apply for a business loan or SME loans can be completed online. Following the online submission of forms and testimonials, the application is usually vetted within a few weeks.
