How to Calculate Your SME Loan Eligibility

An SME (Small Medium Enterprises) or MSME (Micro Small Medium Enterprises) loan can be availed by small companies for financial support for business purposes. The SME loan is a flexible way to get capital for your SME’s needs. The money can be used for long-term requirements as well as working capital. The approval of SME financing depends on the type of the company, the cash flow, the age of the company, and more. Micro-, small- and medium-sized enterprises, as defined under the MSMED Act, can apply for an SME loan.

Table of Content

• The Advantages of an SME Loan
• Who Can Apply for an MSME Loan?
• Understanding the Eligibility Criteria for an SME Loan
• Factors that Affect SME Loan Eligibility
• Understanding Repayment

The eligibility criteria for an SME or MSME loan generally varies from one lender to another, and the interest offered generally depends on the profile of the applicant, the loan amount, and business history.

The Advantages of an SME Loan

There are several advantages that businesses can avail when they apply for an MSME loan.

• SME loans can be availed for fulfilling both short-term and long-term business goals, and they can also be used to help with the day-to-day working of the business.
• MSME loans can support the business in buying inventory, without having to wait for cashflow.
• Most other business loans have stringent eligibility requirements, like a certain credit score, and heavy paperwork. On the other hand, when you apply for an MSME loan, the requirements are more basic.
• Property documents or mortgaging business assets in lieu of funds are not required for availing an MSME loan. These are collateral-free loans with flexible repayment terms that you can avail.
• MSME loans allow small businesses to tap into new growth opportunities, helping them increase their sales and customer base.
• Offers adequate working capital to allow companies to grow business volumes.

Who Can Apply for an MSME Loan?

Businesses scaling their operations, purchasing equipment, investing in infrastructure, or looking to meet their working capital can apply for an SME/MSME loan. The loan can be availed by existing as well as new micro-, small-, and medium-sized enterprises across various sectors. The eligibility criteria can include different factors, depending on the lender, such as the creditworthiness of an enterprise, annual turnover, years in operation, adherence to regulatory requirements, etc. The financial stability, potential for growth, and the repayment capacity of the business may also be taken into consideration.

Understanding the Eligibility Criteria for an SME Loan

The main criteria that almost every lender specifies for eligibility for an SME loan includes the sector or sub-sector that the business works in, the annual turnover, and the requested loan amount.

The Sector of Sub-Sector

Small business loans can be availed by self-employed individuals, sole proprietorships, private limited companies, and partnerships. The loan can be availed by enterprises in the manufacturing and service industries.

The Annual Turnover

The minimum annual turnover requirement for an SME loan may vary from one loan provider to another, but it generally depends on the sector and the size of the business. For instance, in the manufacturing sector, for a micro-level business, the annual turnover should be more than 25 lakh, more than 5 crores for small businesses, and 10 crores for macro businesses. In the service sector, the annual turnover should exceed 10 lakh, 2 crores, and 5 crores for micro, small, and macro businesses/

The Requested Loan Amount

Based on the eligibility of the business, you can avail an SME loan for anywhere from a few lakhs to crores. You can use an MSME loan calculator online as well to get a better idea of the same.

Factors that Affect SME Loan Eligibility

There are several factors that can affect an applicant’s eligibility for an MSME loan. These include your geographic location, existing debt, business premise and housing situation, business income, business transactions, age of the business, and if there are any loan defaults under the business’s name.

Suggested Read: 5 Secrets to Know About The SME Lending Market In India

Understanding Repayment

Before availing an MSME loan, you should ensure that you are making the right decision. Carefully assess the necessity of the loan before you apply for it. If you have a fair idea of what you may be offered as your MSME loan interest rate, the calculation of the EMI can also be done manually for different tenures. The formula for the same is:

[P X r X (1 + r) n] / [(1 + r) n - 1]

Here, P is the principal loan amount borrowed, r is the rate of interest, and n is the tenure in months. However, you can also use an online MSME loan calculator to get a fair idea of the financial strain that the loan repayment will create in the long run for more convenience. You must make sure that you choose a loan scheme that is within your financial means and which you can repay with ease.

If you need funds in a hurry in order to meet the financial needs of a company, an SME loan is one of the best choices available for you. With easy eligibility, quick approvals and disbursals, minimal documentation, and flexible repayment terms, SME/MSME loans simply make sense.