Want an SME loan? Check the fine print

The trick lies in minute detailing

Much has been spoken and written about startups being the lifeline of the Indian economy. But ask any startup about their quest of fundraising and you will come across stories of long hard discussion with banks and NBFCs. With the final discretion lying with the bank, taking an SME loan is not as easy as it may appear.

Why reading the fine print is essential?

Because of limited loan opportunities, whenever new startup companies are offered a loan, they are quick to not let the opportunity go by. Unfortunately, in many cases, they fail to read the fine print of the loan which could lead to a financial dilemma at a later stage.

Things you need to check in loan fine print:

A loan print documentation is not a mere formality. In the event of any misunderstanding between the bank and you, the final authority is the loan agreement signed.

Many businesses have committed the cardinal sin of relying on word- of- mouth assurances from their bankers or loan agents. They did not take the time out to read and understand the loan terms and condition, especially the finer print.

Banks may seek collateral security at a later stage:

Not all SMEs have adequate collateral security to begin with and even if the bank offers you a loan under the CGTSME scheme the bank reserves its right to seek an additional collateral security at the later stage.

Under the CGTSM scheme, loans up to Rs 1 crore are offered to SMEs without the need of any collateral security. The fine print is that the final decision lies with the bank whether to accept or deny your loan request.

So you could never be 100 per cent sure that your loan request under the CGTSME scheme without collateral security would be approved by the bank. If you have your business plan in place with adequate projections and all other norms as per the satisfaction of the bank, you may get a collateral free loan but banks could seek a collateral security anytime in the future.

The interest rate can be reviewed as per the fine print:

You should always have a provision to be able to pay a slightly higher loan EMI as and when the banks increase its interest rates. Some loans come with a prefixed tenure after which the banks will relook the loan amount and the interest rate. Make sure to read your loan fine print to know if there is any fixed date after which the bank will reset your loan interest rate.

Things you should do as a business owner seeking bank loans:

Here is a list of things you should be doing as a business owner before opting for a business or SME loan:

• Before signing any loan agreement take time out and read the loan agreement including the fine print.
• Do not say yes to the first loan approval you come across unless you are aware of all the loan details and intricacies.
• Discuss the loan agreement with your legal counsel to know your exact legal rights in the future.
• If there are any unclear areas in the loan agreement discuss it with the bank.
• Do not rely on word- of- mouth assurances and make sure everything is written in black- and- white irrespective of how big or small the loan offer or details.

How have you been benefited from the fine print of SME loan? Do share your story.