SME loans in India: myths and facts to consider before applying it

An SME loan is the best option for a small business to obtain quick finance without the hassles of extensive paperwork. Further, the application process of the business loan has been considerably simplified by the fintech lenders, with the adoption of cutting-edge technologies. Business loans from fintech players offer several advantages from easy EMI repayment options to competitive interest rates, unlike profit sharing terms like investors. However, despite the obvious benefits, there are several myths that have clouded the minds of SME loan applicants. We shall debunk these myths with factual analysis.

Myth 1: Chances of loan rejection are high in case the loan requirement is nominal

This is completely untrue. The loan amount applied for and sanctioned in entirely dependent upon the business requirement. The loan approval is contingent upon satisfying the eligibility criteria of the lender.  Even an SME can apply for a small ticket size loan and get the same approved from an NBFC within a week if its financial metrics are strong.

Myth 2: Personal Loan wins over a Business Loan

This again does not hold in many instances. Although the processing time of personal loans is faster compared to business loans, their sanction limit is much lower in case of a personal loan. Further, the interest rates on business loans are relatively lower than personal loans. Further, the creditworthiness of the business owner in his individual capacity is considered while granting a personal loan. This does not help build the credit standing of the business. Further, small business is prone to business cycles. In case of the business hitting a low, the credit score of the promoter takes a hit, which will impact future chances of obtaining a loan. It is prudent to keep personal and business finances separate from the tax angle as well. Interest on business loans can be shown as a business expense deduction in the P&L statement and goes towards reducing the taxable profits of the business.

Myth 3: Procuring a Business loan is plain tough

There is a common fallacy that it is difficult for an SME to obtain a business loan apply. If one meets the eligibility criteria of an SME loan i.e. at least Rs 40 lakhs turnover, a decent credit score, submission of GST and IT returns and an operating vintage of at least 3 years, there is a high probability of loan approval. Further, fintech lenders extend loans via a simple online process with the absence of collateral security.

Myth 4: Lenders will insist on a business loan against property

This is not always the case. In the case of banks, the collateral security is mandatory in most cases. However, in the case of fintech companies, there is absolutely no collateral cover required to avail a business loan. It is difficult for SMEs to offer assets as mortgage owing to their limited asset pool.

Myth 5: It is better to use one’s personal savings rather than availing a business loan

It is highly risky to dip into one’s personal savings. In case the business fails, one would be completely bankrupt as one’s personal savings would not be available for future financial needs. One must maintain separate accounts for personal and business finances. It’s a complete no-no to mix the two.

Myth 6: Best to approach banks for business loans

There is no such evidence available which confirms the veracity of the above. In several cases, an SME can obtain an SME loan from an NBFC, even in spite of the loan application having been rejected by banks. In reality, banks stipulate tough conditions for loan approval, which is difficult for SMEs to comply with. Hence in all cases, it is not necessarily that big is best.

Myth 7: The personal CIBIL score is of no consequence

This is a complete misconception. A credit score is one of the primary aspects that lenders consider prior to loan disbursement. A lender is mainly concerned with the repayment capability of the business. Hence the credit score is a strong indicator of the creditworthiness of the borrower. In case the business suffers loss, the loan amount can be recovered from the promoters.

Myth 8: You need an ideal credit score to get a business loan

This is an exaggeration of the truth. While a decent credit score is vital, in case of a strong financial position of the business, the lender would consider extending the SME loan. The lender may extend loans at higher interest rates to an entity with poor credit scores if it obtains assurance on the repayment capability of the business unit.

Myth 9: Only interest rate matters

This is a short-sighted approach to obtaining a business loan. While an attractive interest rate can help in savings of financing costs, one cannot restrict the analysis to purely the interesting pricing. Some of the other important aspects comprise any hidden costs, processing fee, charges, the reputation of the lender, tenure of the loan, the loan amount and most critically the absence of collateral cover.

News Reporter