Regardless of the size of your business, managing its financial health is one of the cornerstones to growth and profitability. The needs of your business can be different depending on its size and scale. An established business would need money to expand its presence, hire new employees, or launch new products. On the other hand, the immediate needs of a startup would revolve around achieving short-term goals like financing daily operations. To meet such needs, banks/financial institutions offer multiple types of loans for business purposes.
The two most common such loans are business loans and SME loans. Here’s a comparative analysis that will help you understand the two better.
|Parameter for comparison||Business loan||SME loan|
|Documentation||This requires extensive documentation like financial statements, income tax returns, lists of shareholders, property deeds, etc.||Minimal documentation is needed here. This usually includes GST documents, KYC documents, income tax returns, and business-related bank statements.|
|Collateral/Credit History||Banks prefer granting business loans to businesses with a credible track record or a sound credit history. In the case of secured business loans, banks expect the borrower to use a high-value asset as collateral against the loan.||While granting SME Loan, banks usually don’t require borrowers to submit credit history. Moreover, entrepreneurs don’t have to submit a collateral, which allows them a lot more security.|
|Disbursement time||Right from the time you apply for business loan to finally getting it approved, banks go through a series of formalities to whet your credibility. Therefore, it may take a bit of time for you to receive the loan amount.||As a means to encourage entrepreneurship, the Government of India has passed a mandate that all SME loans need to be approved as well as transferred to the account of the entrepreneur within a period of two days from the time of approval.|
|Loan Entitlement||If the borrower fulfills the business loan eligibility criteria, he can get a loan amount of somewhere between five lakhs to 75 lakhs.||These loans help startups to cater to the SME working capital. Therefore, they usually range from one to 20 lakh. However, once the business grows to a significant size, startups can apply for a business loan|
Before you take any loan, you must carefully evaluate the various charges associated with these loans. Comparing interest rates alone is not the right approach for comparison. It’s imperative to understand your capacity for loan repayment before you take any loan for business. Financial institutions come with self-sufficient tools like business loan EMI calculator to help you plan your loans and EMIs better.
Once you are thorough with these nuances, you’d be in a much better position to make an informed decision.