Loans of any kind require you to repay the amount borrowed with an applicable interest rate in a certain amount of time. Although this basic criterion remains the same, the loans vary based on the reason for fund borrowing and associated characteristics vary accordingly.
Before we understand the differences in the loans for a small and medium enterprise and start-ups, let us know the basic differences between the two types of businesses.
What is Difference Between SME Loan and Start up loan?
A SME is either a manufacturing or service enterprise where the investment in capital assets is from Rs 25 lakhs to Rs 5 crores in case of small enterprises and Rs 5 to 10 crores in case of medium enterprises.
The specifications have to be as per the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
The 'Start up India' initiative had defined the meaning of startups in India to classify them in order to fund them through government programs. Private financial institutions also follow the same criteria.
As per the definition, a business is considered a start up if its turnover is less than Rs 25 crore and has existed for not more than 7 years since registration/incorporation. Another important feature is that the business is built for working towards innovation or improving an existing product, process or service.
SME on the other hand can be a small traditional business like a hospital or a mill.
Difference in Loans
Loans are given to a SME for starting a new business as well as expanding an existing one. An existing business should have a stable and growing business. The records on tax filing are also essential to submit to the bank.
The loans can range from Rs 1 lakh to Rs 50 lakhs, and has a tenure of 1 to 4 years. The interest with a private financial lender could be between 18 to 24%. The interest rate will depend on the enterprise's business profile.
For example, loans for businesses run by women from low income background receive loans at a much lower rate.
Startup loans on the other hand are business loans that can be given for working capital for day to day process as well as term loans. The business should qualify as a startup based on the criteria set by Start Up India initiative.
These companies need to show a significant profit margin on their business. For collateral, an equipment or machinery could be given. The bank can ask for personal guarantee from the director or promoter of the business.
Line of Credit
A line credit is a type of business loan given to start ups and it works like a credit card. Just like in the case of a credit card, your business needs to have a good credit score. Your credit limit will be based on that. The best part is that for the first 9 to 15 months (depending on the bank) of borrowing you do not need to pay an interest, so this will give the business sufficient time to recover its expenses.
To avail this facility, you will have to submit a detailed credit report. No collateral is required for this kind of loan.
You will however need to pay an interest on the amount after that period, it could range from 8 to 20%. The interest will only be paid on the amount borrowed and not your credit limit. For example if you have borrowed Rs 2 lakhs but your line of credit provides you a bracket of Rs 10 lakhs, you only pay the interest on Rs 2 lakhs.