SME Business Loan Eligibility

Company Type is a Top Factor Affecting Your SME Business Loan Eligibility


A funding winter has hit the Indian startup ecosystem, with investments dropping by 75% in the first quarter of this year. Moreover, the country has not had a single unicorn (a privately owned startup valued at over $1 Billion) yet in 2023. In this scenario, adequate investor funding looks like a distant dream for many small businesses and startups.

However, entrepreneurs and business owners can apply for business loans that are tailor-made for small and medium enterprises. Such loans are a reliable source of funding, offered by lenders such as banks and NBFCs.

SMEs which meet the business loan eligibility criteria can enjoy a lump sum amount. It can be repaid through regular EMIs at predetermined rates during a set tenure.

Here are a few important facts and features of SME business loans. This includes how to calculate loan EMI amount and a list of factors which lenders gauge to determine an SMEs’ business loan eligibility.

Key Highlights of SME Business Loans

Due to their easy accessibility, business loans are a great option for new entrepreneurs setting up new ventures. It’s also ideal for seasoned business owners who are focused on expansion.

What is an SME Business?

For SME business owners, two criteria define the category of your business, namely:

  1. Investment in machinery, plant, and equipment
  • Small business – Up to ₹10 Crores
  • Medium business – Up to ₹50 Crores
  1. Annual turnover
  • Small business – Up to ₹50 Crores
  • Medium business – Up to ₹250 Crores

Apart from these factors, loan offerings will vary depending on whether your business categorises as small or medium.

Which Businesses Can Apply for a Loan?

Any SME owner between the ages of 21 and 65 years can apply for a business loan, with interest rates   from 9%. Unsecured business loans are usually available for a tenure of 1-5 years, for up to ₹2 Crores. However, this varies across lenders. 

The EMI for such loans can be easily calculated using a Business Loan EMI Calculator. This allows you to chart out monthly repayments in advance and as per your company’s cash flow.

Benefits of Availing an SME Business Loan

If you’re still unsure about using credit, check out the following benefits of availing a business loan.

  • Easy and Quick Access to Funds

The process of applying for an SME loan is 100% digital. You can check your business loan eligibility online and complete the application in just a few minutes. This allows you to focus on your business, without having to take out time to visit the lender’s office.

  • Tax Benefits

Interest paid on an SME loan is tax-deductible in India. By deducting the annual interest paid on your loan, you could reduce the taxable income of your SME by a significant amount.

  • No Need for Collateral

Due to the small scale of operations, SMEs may not have high-value assets to provide as collateral for loans. Even if it is available, submitting it as security could affect the company’s future valuation. SME loans allow you to secure the required funds without the need to pledge any assets.

  • Flexible Repayment Options

Many lenders offer flexible terms for tenure, loan amount, and repayment. You can negotiate these, based on your credit score and qualification of the business loan eligibility criteria. Some lenders also waive off part-payment fees. This makes it easy to pay off the loan once your bottom line improves.

Factors Affecting SMEs Business Loan Eligibility

These are the main factors which determine whether or not your loan application gets approved:

  • Business Vintage

To be eligible for an SME loan, your business needs to be between 1-3 years old, depending on the lender. This lets financial institutions determine the business continuity and financial stability of your company. Lenders also assess business loan eligibility by scrutinising the financial performance.

  • Type of Business

Lenders need to be assured of your repayment capacity in order to offer a business loan. For this reason, if your venture falls under the category of risky businesses, getting a loan approval can be difficult. New SMEs and startups that have no credit history may also find it difficult to secure business loans.

  • Credit Profile

A high credit score is non-negotiable while applying for a collateral-free or unsecured SME loan. Moreover, a history of paying existing debts on time and a balanced portfolio conveys to lenders that you are a credible borrower.

This, in turn, allows you to negotiate for lower interest rates and other terms. For existing businesses, the credit profile of the company is weighed. On the other hand, for new SMEs, the credit history of the founders is taken into account.

  • Cash Flow and Turnover

To be further assured of repayment, lenders will offer you an SME loan only if you own a profit-making business. Your submitted financial statements will let them review your operating profit, cash flow, and turnover figures.

This paints a picture of your company’s future income. While this is the case for existing businesses, for early-stage startups lenders focus on growth strategy.

Which Type of SMEs Struggle with Business Loan Eligibility?

SMEs and startups involved in high-risk businesses such as restaurants, travel agencies, and pharma may find it difficult to meet the business loan eligibility criteria. This is due to high industry risk, limited financial history, and higher chances of default. 

Overall, a business loan is a common credit instrument used by ventures to address diverse financial needs. While loan approval depends on your profile and business requirements, companies must work to improve their business loan eligibility

There are many private and government credit options available in the market, which cater to the nuanced business needs of SMEs. Make sure you do sufficient research and choose the best option for your business needs.