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Understanding the Difference between SME Loan & Start-up Loan

Every business needs finance for smooth functioning of the day-to-day activities. Funds may be required by small and medium enterprises (SMEs) as well as start-ups for various purposes such as meeting working capital needs, purchasing plant and machinery, paying salary and wages, as well as for growth and expansion.

Start-up loan

A business loan borrowed by entrepreneurs for the purpose of establishing a new venture is known as a start-up loan. New business owners may borrow a term loan or asset-backed loans to meet their capital needs.

SME loan

The SME sector in India contributes greatly to the economy of the country. In order to facilitate the development of the SME sector, there are various SME loan options available to them.

Difference between start-up loan and SME loan

Though both the types of loan ensure timely availability of finance, there are certain parameters that differentiate the two.

Following are three major differences between a business loan and an SME loan.

1. Purpose

SME finance is generally provided to entrepreneurs to establish a new business or grow and expand the existing one. Start-up loans, on the other hand, are used to finance the establishment of a venture.

2. Borrowing amount

Another differentiating factor is the borrowing limit. While an SME loan ranges from INR 3 lakh to 75 lakh.

3. Eligibility criteria

It is necessary to fulfill the business loan eligibility criteria before applying for finance. In the case of small business loans, the borrower or promoter must be in the age group of 25 to 65 years, have a record of tax filing, prove profitability for the past 3 years, and must provide proof of business growth. A start-up loan mandates a minimum turnover of INR 1 crore, positive figures of profit after tax (PAT), and a good credit score.

Many financial institutions, especially non-banking financial companies (NBFCs) offer small business loans to SMEs and micro, small and medium enterprises (MSMEs) to facilitate their growth and expansion. Business owners may avail of an MSME loan for various purposes, such as conducting marketing activities, meeting working capital needs, recruiting, and expanding production capacities. An MSME loan is, therefore, a credible finance option for enterprises to expand their business easily.

Entrepreneurs may apply for a business loan and enjoy flexible business finance offerings. With many NBFCs offering loans, businesses may enjoy flexible tenures. Besides, some NBFCs provide door-to-door service to provide a great degree of convenience to their customers. They also provide competitive business loan interest rates. Businesses may, therefore, enjoy such benefits and apply for a loan. They may submit the application form along with the necessary documents required for the business loan. Upon successful approval, the amount gets disbursed. Businesses may use the disbursed amount for growth and expansion.