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5 Key Steps to Get an SME Loan

Running a business comes with its fair share of troubles that can pop up unknowingly. However, it is no secret that busin

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esses can often come across situations when there isa dire need for finances. Either the enterprise is looking to expand,or it wants to stabilise the cash flow – the need for fund scan be sudden.

So, what are the options for an SME if they require immediate funds? Well, SME business loan is the best option if an enterprise needs credit.

What is an SME Loan?

An SME Loan is a type of business loan that is offered to small and medium enterprises. These loans are tailor made and perfectly suit the requirements of a medium-sized business. Different financial institutions will have different requirements and features for business loans.

For businesses looking out to get an SME loan, here are the steps they need to follow:

  1. Identify the Need for the Loan

SMEs must have a clear idea and establish a need for a loan. Having a valid reason is essential to get a loan from most financial institutions. SMEs must back up their business plan that explains the purpose of the loan. Typically, businesses applying for an SME loan do so to expand their production, enter new markets, purchase equipment or improve distribution. The reason for applying for a loan must be a valid one. However, some financial institutions offering unsecured loans will ask for no paperwork of that sort.

  1. Understand the Types of Small Business Loans

Before applying for an SME loan, it is essential to know about the types of loans available. Also, establishing the amount of loan a business needs is also a good idea at this point. Here are the types of loans available for SMEs:

Secured Loan – Secured business loan requires a lot of paperwork and some form of collateral from the borrower. The process is typically extensive.

Unsecured Loan – Unsecured loans require no collateral from the borrower (SME). These are highly flexible and approved almost instantly. There’s also minimum paperwork involved when getting an unsecured loan.

  1. Decide the Financial Institution

Certain financial institutions specialise in lending to SMEs. They have a lower rate of interest and are more flexible than others. Determining the right financial institutions will help the SMEs in many ways throughout their repayment journey. Generally, choosing the lender with the lowest APR (Annual Percentage Rate) is advisable.

Compare two-three different lenders on total borrowing cost and as long as the repayments are regular, choose the one with the lowest APR.

  1. Find Out the Eligibility and Requirement

After determining the lender, SMEs need to know if they are eligible for a loan. Also, it is a good idea to chart out the requirements at this point.

Every financial institution will have a different requirement; however, there will be an overlap. The list below explains the most common ones:

  • Bank Statements – SMEs need to have current bank account statements for one year
  • Proof of Business– SME applying for a loan must be minimum one year old
  • Collateral– The type of load (secured vs unsecured) will determine the collateral when taking a loan
  • PAN Card
  • Aadhar Number

Other than these requirements it is also crucial for an SME to know their credit score. A high credit score enables SMEs to borrow at a much lower rate of interest. A credit score is also a factor that helps in loan approvals as it showcases trustworthiness and foretells the repayment capacity of the SME.

  1. Prepare Documents and Apply

Once everything above is lined up, it is time to prepare documents and apply for an SME loan. Typically, an SME will need to submit bank statements, business proof, ID proofs, tax returns and legal documents such as commercial lease and articles of incorporation. Basis the lender, there might be branch visits involved.

The entire process– from applying to the approval of the loan will take time depending on the lender,and the requirements will vary. Some financial institutions have an entirely online process where there are no branch visits,and the loan approval is instant. Financial institutions like ABFL Direct offer loan without security (unsecured) and the repayment tenure is flexible. There is minimal paperwork involved,and the application process is online for an SME loan. It is essential to make an informed decision and follow these steps when applying for an SME loan.

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