In this article, Leepakshi Rajpal discusses the documents required for getting an SME loan from a bank.

Introduction

This article basically talks about the documents that are required for getting an SME loan from the bank. Before going into the details of the documents required let us look into the concept of the SME loan and what are its objectives and scope of the same. We must also know for what purpose it is taken.

An SME loan stands for the Small Medium Enterprise loan which means that it is the loan which is provided to the small or the medium enterprises so that there is credit flow in this sector as well. Therefore, this loan is provided basically for the credit flow of the enterprises which is either small or medium in nature and not any other enterprises. There are various difficulties that these sectors face, which can be solved or looked into with the help of these loans, therefore, these loans help them either recover from the losses that they have been suffering or help them expand and administer the enterprise that they have been running.

Further, we shall look into the concept of the objectives of the Small Medium Enterprise Loan and classification of the same which will be further followed by the primary objective of this article that is to provide the details of the documents that are required for the approval of an SME loan from the bank.

To whom is the SME loan provided?

SME stands for the Small Medium Enterprise loan as the name suggests it is meant to target the micro, small and medium enterprises but what are these? Let us look at them with a little detailing over them.

Microenterprises

Micro Enterprises are those enterprises which are engaged in the manufacturing of goods and services in which not more than 25 lakh rupees invested in the plants and machinery. If at all the microenterprise is a service sector enterprise then up to Rs.10 lakh will be invested in the equipment and not more.Therefore these enterprises are not huge scale enterprises which involve a lot of investment in the plants and the machinery.

Small enterprises

Small enterprises are those enterprises whose investment in the plants and machinery will range somewhere between Rs.25 lakhs to Rs. 500 lakhs, and where the small enterprise is a service sector enterprise then the investment in the plant and machinery will be in between Rs.10 lakhs to Rs.200 lakhs.

Medium enterprise

Medium Enterprise is an enterprise which the investment for the plant and machinery will be ranging between Rs.500 lakhs to Rs.1000 lakhs and if the medium enterprise is a service sector enterprise than the investment in the equipment will be ranging between Rs200 lakhs to Rs.500 lakhs.

Who can Apply for an SME loan

The businesses involved in the application of an SME loan are the:-

1. Self employed individuals who are looking for expansion of their business
2. Other private limited companies
3. Proprietorship firms that apply for an SME loan to progress and excel in their business ventures.
4. Partnership Firms also engage in the application of an SME loan in order to seek a long way in their respective business fields and establish warehouses and other things required.

Objectives of an SME Loan

A Small Medium Enterprise loan is given basically to accomplish certain tasks that are required for the efficient functioning of these small and medium enterprises. Therefore the discussion of the objectives of these is important so as to know what companies will qualify for the approval of such loans and benefits from the bank.

The objectives are as appended below:-

1. To improve the credit flow to the SME sector, which means that the incoming and the outgoing of the money should be balanced in the industry, taking into account the impact of these SME into the economic flow. Therefore, these loans help in the maintenance of the credit flow into these small medium enterprises.
2. To formulate norms or rules to the SME sector to ensure that the adequate and timely credit is available to the sector, which means that apart from maintaining it also takes up the responsibility of forming the rules and regulations according to which the SME sector will have the incoming and the outgoing of the credit into their enterprises.  
3. The SME loan policy also provides guidelines to the branches offering credit to the SME sector and to formulate the norms of lending money to the SME sector, which means that this policy also helps the SME to take the loans from external sources i.e. other than the banks, therefore, guidelines are provided to the other sectors as to how much credit to lend and to also form the norms of lending.
4. To devise an organisational structure to handle the SME credit portfolio in a focused manner, which means that to take into account every other detail of the credit inflow and outflow so as to maintain a portfolio regarding the same.

Documents Required For Getting an SME Loan Approved From the Bank

This part of the blog deals with the various documents required for the approval of the SME loan from the bank. The documents are divided into two categories, in which one is the normal document structure and the other is the Facility specific document. In the first one, all the documents that are general in nature and will be required by any bank to give approval to an SME will be mentioned and in the second category documents, only those documents will be mentioned which the SME wants it to be specific facility available to them.

General documents

This section of the documents list down those documents which every bank would require the SME’s to file and appear before them. Appended below are the lists of the documents along with the purpose of them being given or filed with the bank.

• Application Form – the first form that should be filled in should be the application form which should contain all the necessary and mandatory fields filled in without which the application form would not be accepted. After the filing of the application form, the acknowledgement should be given to the customer regarding the reception of the application.
• Self-Attested Copies of the Know Your Customer (KYC) Documents – These are the second kinds of documents that every bank will require to be given to them which means that these Know your customer copies contain all the documents that give proof regarding the name, age, gender, address proof and the other necessary details.

These documents include the Entity proof and for this, the customer has to give either the partnership deed or the certificate of incorporation or the shops and the establishment certificate which basically gives the proof of your legal existence and also the residential existence.

A copy of the PAN card of the entity is also to be given, or as otherwise provided the PAN of the directors, proprietors or partners are also to be given or if this is also not available then the PAN card of the guarantors or the security providers is to be given. This is to ensure transparency in the credit flow of the enterprise.

The third type of document that comes under the Know your customer documents is the address proof of the directors, proprietors, partners, directors, entity, security providers and the guarantors like the aadhar card.

Financial Documents

These documents are required to keep a check on the enterprise as to its well-being and to maintain transparency and efficiency in the working of the enterprise. These type of documents generally include the following:-

1. Last three years audit/provisional financials which include the balance sheet, profit and loss sheet along with the schedules and notes to the accounts, tax audit reports and the statutory audit report. These documents are required in order to keep a check on the enterprise as to the frauds and the misrepresentation of the accounts and the balance sheet and also the ability to pay back the loan. Therefore, the submission of these documents become a vital part in the process of SME loan grant.Also, where the financials are provisional in nature VAT returns are also required to be filed, in order to ensure that the tax has been properly filed.
2. Another document that is required under the same head is the Current year performance and projected turnover on the letterhead of the entity. This is to ensure that the enterprise is capable of paying back what it is taking and that it is not going into numerous losses.
3. Last 1 year income tax returns of the borrowing entity along with the computation of the income and the copy of the acknowledgement and if at all it is filed online then the acknowledgement number of the same is required for the proof of such submission.The income tax returns of the borrowing entity is to be filed to ensure that there is no more credit on the company advanced until and unless there are no heavy dues on it of which it is incapable to pay.

• Bank Statements not more than 45 days old

This document includes the bank statements for the last six months if the borrower is borrowing for the first time and twelve months in case of takeover proposals. In case of multiple banking, statements covering minimum 75% of banking turnover is to be provided. This is to ensure that the legal entity exists and is not mere fraud or misrepresentation in the name of the entity. This also means that the between the first and the second borrowing the enterprise should be at least 12 months old i.e. one year old, only then the bank will provide with the SME loan.

Other Facility Specific Documents

The other facility specific documents that the banks require are the documents which are to be given or submitted for deriving a special facility out of the funds of the SME loan. In such a case following are the documents that are to be submitted:-

1. The contract agreements of the Letters of intent of the members of the enterprise and the order copies with the orders in hand along with the status which has to be guaranteed by the bank.
2. Last three inland letter of credit transaction details for the ascending track record.
3. The project report containing the cost of project, means of finance, the expenditure incurred and the other projections along with the justifiable details.
4. In case of term loans the government approval for power, pollution, building plan along with the documentary proofs is also required.
5. In again the case of term loans, the performance invoices of assets to be purchased, copy of allotment letter or conveyance deed in case of land, architectural certificate for the validation of the cost of the building to be constructed is also to be provided.

Things Banks considers before giving loan to an SME

1. Credit Rating

This means that the bank must consider the financial history of the company along with the credit financial reports, which include the public filings and the credit scores as well. So When the bank takes into consideration all such information, and the bank is satisfied that the company is reliable and pays all its dues on time, the banks give the loan and if not, then the SME has to again satisfy the bnnk as to its credibility and ability to pay back the loan.

2. Financial Standing

The company needs to provide for its financial standings to its bank which means that the annual financial returns are to be taken into consideration before the bank provides the loan to an SME.Therefore, when the bank is satisfied that the company will be able to repay the loan, the bank provides for the same.

3. Collateral

In most cases the bank requires the collateral as a form of security to be provided for the loan that the bank will be giving. This ensures that even if the company does not pay in nay circumstances, the bank is able to recover that money by selling the collateral that the SME will provide as a security.

4. Bank Relationship

Apart from these factors the banks also take into account the previous relationship of the companies with the banks.They take into consideration various factors such as the existence of accounts in their banks or the previous sponsors or relationship that has existed between the bank and the company.If the relationship between the company and the bank is that in the good terms then the bank can easily provide a loan.

5. Management Guarantees

In case of an SME wanting a loan, the management has to provide for the guarantee of the payment in written and therefore, on their guarantee the bank takes into account the various different factors and provides loan to an SME.

6. Low Earnings

In order to get a loan from the bank for an SME, you need to show low earnings because you want that loan for a progressive purpose and that if the company is already growing, why will the bank provide the loan?. Therefore it is necessary to show that the earnings are low but capable of returning the loan taken from the bank.

Conclusion

So, now that we know about SME loans, do not forget to attach these documents before applying for one. Do take care of the self-attested documents and how these documents make a difference, and then if your SME wants a specific facility then in addition to the general documents provide them too.