Startup Loan vs SME Loan: Know the Eligibility and Benefits

Startup Loan vs SME Loan
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Life is full of ups and downs. So while we enjoy the happy times, we should also be prepared for the tough challenges that life may present us with. Luckily, financial difficulties are something that can be managed with the help of loans. It does not only help you pay off debts but also gives you peace of mind.

But have you ever thought of the various kinds of loans there are? Of course, each one of them has different eligibility criteria and perks. Today, we talk about the difference between a start-up loan and an SME loan

What is a Start-up?

In our country, start-ups are entities that have been in existence for not more than seven years and do not have a turnover of more than ₹25 crores. Another distinctive characteristic of start-ups is that their business line is focused on innovation, development, and therefore the overall improvement of specific products or services. 

So, the main idea of a start-up is to establish a new business idea into existence. With this, a fresh concept is conceived for business which aims to make processes easier and advanced while earning profits is the secondary aim. 

Benefits of Start-up

Here are some benefits that start-up in India enjoy: 

  • Easy and simple online registration
  • Easy and quick access to funds 
  • Tax holiday for three years 
  • Tax exemption on registration 

What are Small and Medium-sized Enterprises (SMEs)? 

SMEs are small scale entities where the investment in capital assessments ranges from ₹25 lakhs to ₹5 crores for small enterprises and ₹ 5 to 10 crores for medium enterprises. 

While profits are secondary in a start-up, in small-medium enterprises (SME), the primary goal is to earn profit. These are not focused on improving any existing processes. Thus, SMEs can range from opening up a small shop to set up a medium-level power plant. Usually, SMEs start earning profits from the first day, which is not the case with start-ups. 

Benefits of SME

There are also some of the benefits that SMEs enjoy; let us discuss: 

  • SEZs (special economic zones) allocate 10 percent of space. 
  • Government stores purchase programme 
  • MSME Act (cluster development, technology upgrade, tool rooms, energy efficiency, skill development, manufacturing competitiveness, and product quality) 
  • Financial assistance by the government (post-issue face value less than ₹25 crores)

Fundraising Gap Between Start-up and SME

A business requires an adequate amount of funds to ensure all the day-to-day procedures are executed smoothly. And for this, one might need investors.  

Once a start-up begins to grow, it starts receiving funding from angel investors and venture capitalists. They buy out a stake in the company with the help of their investments. Over some time, they can have control over the major decisions of the business while the founder’s control over the company starts to diminish. 

Funding an SME is also somewhat similar, except for one thing. The founder’s interest is in retaining control over the business. This means that the founder can look for financial assistance from institutions such as NBFCs for the growth of the business without relinquishing control over significant decisions. 

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Difference between SME and Startup loans

There is a big difference between a start-up and MSME eligibility criteria for loans. Thus, one needs to do thorough research before applying for either of them. Generally, loans for SMEs can range anywhere from ₹1 lakh to ₹50 lakh. However, for start-ups, one can apply for loans that go as high as ₹5 crore. 

Talking about the interest rate, for SME loans, it is usually between 18 to 24 per cent. However, there can be some exemptions for a few SME business profiles. For instance, if a woman manages the business, the SME could avail an exemption and provide a much lower interest rate. Usually, the tenure for an SME loan is said to be between 12 and 36 months. But, on the other hand, for start-up loans, working capital for day-to-day processes can be provided. (check business loan interest rate here)

Understanding the difference between a start-up and an SME is extremely important, especially if you plan to become an entrepreneur. We hope that this information will help you know the basics of both the business models and how loans work for each of them. 

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