How to get a loan for small and medium enterprises (SME)

When planning to expand business operations or reach to another city, purchase of equipment and machinery, or improve the cash flow, a business loan can be an immediate and viable solution. It can be availed for an infusion of funds and to get access to money easily and immediately. However, before applying for one, it is important to understand how to apply small and medium enterprises can apply for a business loan.


The process of a getting loan for small and medium enterprises (SME) can easily be divided into three parts:

  • Part 1: Prepping for an SME business loan          
  • Part 2: Selecting the right SME loan
  • Part 3: Applying for an SME loan


Part 1: Prepping for an SME business loan 


#1 Evaluate credit score: Lenders will examine and review a company’s credit score when they receive an application for a business loan. So, the first step is to check the creditworthiness via the firm’s credit report. As a business owner, if you are thinking of applying for an SME loan in a personal name or if an SME is relatively new (it depends on the lenders terms and conditions), lenders will check your personal credit score will be checked. If the score, either business or personal, is not good, the best option is to take remedial measures to boost the credit score:

  • Cutting down on credit card usage
  • Repaying outstanding debts
  • Applying for the loan only when the eligibility criteria are met
  • Not applying for multiple business loans simultaneously
  • Ensuring a low credit utilisation ratio


Key points to remember: Poor financial decisions reflect on a credit report for around two years. If the score is low, defer taking a loan until necessary so that past indiscretions have no impact on the loan application.


#2 Review repayment ability: Taking a loan for small and medium enterprises is an easy way to tackle a sudden cash crunch; but do bear in mind, the borrower must start repaying the loan as per agreed terms. If the need for finance is urgent, but means to repay it are lacking, and there is a good chance of missing the pre-decided timeline, look at other ways to generate finance. Some alternates are crowdfunding or an investor (angel or capitalist).


#3 Create a business plan: When approaching a lender for a small and medium enterprise loan, remember, they will want to see a business plan. Your plan must outline:

  • Why the funds are needed
  • How the funds will be utilized
  • Expected growth and returns


Adding profit projections as well as strengths of key people from the organisation will help establish the enterprise as a worthy candidate. So, writing a business plan before applying for a loan is essential.


#4 Consider collateral: Most loans are availed against a collateral, even though several financial institutions are now offering collateral-free business loans. So, take time to deliberate and select the best loan for an enterprise’s needs.

Key points to remember:

  • Be comfortable with pledging business assets
  • Collateral-free loans charge a higher rate of interest


Part 2: Selecting the right SME loan


#1 Know your options: Once prepping for an SME loan is done, it is time to select the right one. Here’s how to go about it:

  • Explore a wide selection of business loans
  • Shortlist lenders – both banks and non-banking financial institutions
  • Take account of interest rates before zeroing in on one


A thorough research is essential for choosing lenders offering affordable SME finance – when you need it the most.


#2 Check the fees and charges: While evaluating a business loan’s interest rate is the first step, not delving further is a huge mistake. Understanding true affordability requires a study of additional fees and charges, usually inseparable from the loan. This will include:

  • Processing fee
  • Prepayment charges
  • Foreclosure charges
  • Penal interest, and
  • Loan statement charges.


Knowing the total cost will help towards selecting a loan best suited to budgetary constraints.


#3 Look for add-on features: After deciphering the charges and interest payable, the next step requires knowing the add-on features a lender or a loan is offering. These could be benefits like:

  • Minimum documentation requirement
  • Easy-to-meet eligibility criteria
  • Online loan management processes
  • Facility to upload documents online or collection of documents from home or office
  • Quick disbursal – usually within 72 hours


Quick disbursal is especially convenient when a business needs to put in deposit on a new office space, or to commission experts to work on a deadline-driven project. Weigh the importance of the add-on features against the creditworthiness and interest rate offered to make the right decision.


#4 Analyse your eligibility: The loan suiting your requirements may have been identified, but the real question to be asked – “Is the business meeting the eligibility criteria of the identified lender/s?” Here’s how you analyse your eligibility:

  • Visit the lender’s website
  • Go to business loan
  • Click on type of loan
  • Check eligibility which may typically include business vintage, Certificate of Practice (for professionals), tax return documents and audited turnover


If eligibility criteria are being met, proceed to apply for the loan.


Part 3: Applying for an SME loan


#1 Gather the necessary documents: Now that the lender and the loan have been identified, the next step is completing the process to the lender’s satisfaction. What you need to do:

  • Know the documents required to be submitted
  • Fill in the loan application correctly


Documents reinforce the borrower’s eligibility for a business loan; and an application is deemed incomplete without them.


Keep in mind: An incomplete application leads to rejection and a rejected business loan application reflects poorly on the credit report.


#2 Submit your application: Once the application has been duly filled and documents gathered, the next step is application submission. There are four ways:

  • Apply online – lenders allow scanned copies of documents to be uploaded with the form. Some are offering the facility of picking up the documents at a location convenient to you. Online chats or customer care are open 24×7 to help if there is an issue or confusion
  • Visit the lender – go to the lenders office for filling in the form. Remember to carry all the documents to complete work in one trip
  • Lender visits you – some banks and NBFCs are willing to send an executive to a home or office to help fill out the form and collect the required documents.
  • Send an SMS – lenders offer the option of sending an SMS or making a missed call to a toll-free number. The lender will be in touch and help you with one of the above three options


Though online is considered the easiest, the other three options are also good, considering there is a guide helping you at every step.


#3 Review the terms and conditions: This is the golden rule for signing any document and more so for one where your life’s work is involved. Before signing the dotted line, read the loan document thoroughly. Calling executives at the lenders office for clarifying any doubts is expected and acceptable. Be certain of the terms and conditions governing the loan, to avoid litigation and frustration in the future.


#4 Await loan disbursal: Once the loan application process has been completed at your end, the time for waiting begins:

  • If an executive has been guiding you, get in touch with him/her to know the status
  • Or else, wait the required time mentioned for loan disbursal before contacting

If your business loan is disbursed to your account, concentrate on operations and goals. On the other hand, if the loan is rejected, finding the reason and rectifying it is important before reapplying to get a positive response.

Hope this article gave you some insights to get a loan for small and medium enterprises (SME). If you have any queries on this, please drop comments below.

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