As SMEs or Small and Micro Enterprises continue to peddle India’s lagging economy towards growth, they are also facing a simultaneous increase in demand for financing. A suitable source of funding can only support the enhancement of this sector’s growth and expansion. Financing options like SME loan interest rates and charges available at attractive rates of interest have simplified the financing woes for small and medium-sized businesses.
The SME loan interest rate and other charges are, however, an aspect one must gain a wide perspective about to make an informed borrowing decision. Following are some of the popular charges levied on SME loans that you must be well aware of.
Types of SME Loan Rates and Charges
Some of the popular SME loan rates, charges, and fees include –
1. Interest charge
Interest charge on SME loans is usually kept at a competitive rate to facilitate affordable financing for businesses operating in the small and medium enterprises sector. Various loan schemes also bring SME loan interest rates and charges subsidies to ease the financial liabilities arising out of interest levies for convenient repayments.
Interest rates on these loans are levied in two different types, allowing borrowers to choose between based on the running market trends. The types of interest charge include –
- Fixed-rate: These types of interest levies follow a fixed rate throughout the loan tenure. Borrowers can benefit from this levy type when the market trends predict a rise in the rates in the coming times.
- Floating rate: Under the floating rate system, the interest rate levied is adjusted by lenders based on a change in the benchmark lending rate. One can benefit from the floating rate levy in case future SME loan interest rates and charges are expected to decline.
Under the floating rate system, one can also consider the MCLR and RLLR based interest levy, which comes with their separate sets of benefits and disadvantages. Currently, as per the RBI guidelines, lenders must extend funding based on the RLLR based system of lending for improved transparency in interest rate levy.
2. Processing fees
The processing fee is another essential charge levied on SME loans usually at a nominal rate. The fee is levied on the total loan amount sanctioned and is charged at a flat rate based on lender discretion. As the processing fees can vary from one lender to another, you must make sure to compare different lenders and find out the amount payable for a better estimation of your total loan liability.
3. Bounce charges
Bounce charges are contingency fees levied on the borrower in case the cheque sent for EMI payment bounces. The bounce charges are levied for every cheque bounce that the lender may encounter and can cost dearly based on monthly EMIs payable.
4. Penal interest
Penal interest is another contingency charge levied on the borrower in case he/she fails to or delays in paying the EMIs within the due date. Penal interest can be usually high and is levied monthly for each EMI payment delay or default.
5. Document processing fees
Along with SME loan interest rates and other charges, lenders also levy document processing fees based on the number of documents involved. Usually, documents involved in an SME loan processing can be numerous, thus involving a high document processing charge as well.
6. Part-prepayment charge
Borrowers also need to pay additional charges if they opt for the part-prepayment facility. It is a facility that allows you to prepay a part of the outstanding loan amount, thus reducing the overall interest levy and payable by the borrower.
7. Foreclosure charge
Foreclosure is another of the prepayment facilities, allowing you to close your loan account at any time before the tenure ends. Unlike the part-prepayment facility, it requires you to make a prepayment of the entire loan liability outstanding.
For the last two facilities, it is essential to comprehend whether the amount saved by availing them exceeds the charges paid to determine their feasibility.
While the SME loan interest rate and other discussed charges are indicative, not all of them are levied if you manage your loan liability with timely repayment. Before applying for the advance, make sure to check the total cost of the loan so you have a complete understanding of the total loan liability you would need to pay by the tenure’s end.