Small and medium enterprises (SMEs) in India have witnessed tremendous growth over the last few years. The SME sector accounts for more than 95% of establishments in India and is offering 80% of jobs in the manufacturing sector. Considering the pivotal role which the SME sector is playing in the country’s development, it is imperative to bolster its growth with the timely funding.
Nowadays, various banks and non-banking finance companies (NBFCs) are offering loan options which are specifically designed to meet the burgeoning needs of SMEs. While the availability of loan options has come as a blessing in disguise, it has also raised a big question— Should you take an SME loan or liquidate your savings to finance your SME business requirements?
Often people, running a sole proprietorship business, fund their business entirely through their savings just because securing an SME business loan might seem like a gigantic task or because they are against of taking a loan. However, liquidating your entire savings just because you don’t want to take a debt, might not be the right idea.
The upside of using personal savings is that you can save yourself from the expenses of high interest rates and you do not need to worry about the repayment of the loan. Further, you can save yourself.
from potential creditors and the fear of legal notices which could become real in case you delay or miss your loan EMIs. These are, perhaps, in a nutshell, some of the benefits of funding your business with your savings. However, the film is not over yet.
Let’s look at the other side of the coin to know about the benefits of taking an SME loan which you might not be aware of=
For a start, liquidating all your savings and not keeping anything for the future is never a good idea. In case you would any urgent need of funds, you might have to ask your friends for help as you might have used all your savings.
However, it can be an unsure fund option due to the quantum of funds available. In contrast, you can apply for an SME loan for your business at relatively lower interest rate while at the same time enjoying the financial security of having money to take care of divergent funds requirements and unforeseen circumstances in the future.
Second, SME loans are one of the cheapest fund options available in the market to fund your business needs.
You can avail SME loan for up to Rs 25 crore with flexible tenure.
Third, retaining your savings and opting for an SME loan can be an attractive option as you can earn interests on your saving account as well. It means, while you can continue earning interest on your saving account, you can run your business with a relatively less expensive option, i.e., SME loan. Also, you can invest your savings in other income-generating funds to earn more.
The money that you would earn by investing your savings would be more than the interest that you would pay on your SME loan. Moreover, small business loans enjoy tax benefits as well and thus; you can use an SME loan to reduce your tax liability to some extent.
Further, some credit is required to build a credit score and get a loan for business in the future. However, if you would use only your savings to grow your business, you might find it difficult to build your credit profile to seek an SME loan, in case you need it in future. Also, lenders would be interested in checking your personal credit score at the time of sanctioning your loan, however, without credit, it would not be possible.
And finally, with an SME loan, you get the flexibility to borrow as much amount you need to operate your business efficiently. Restricting yourself only to your personal savings would mean you have limited amount to invest, whereas your business would require a high capital flow which can only come from an SME loan.
Remember, business is a risky affair, and therefore, it is always advised to set aside a portion of your savings for your rainy days. So, whenever a question arises whether you should go with an SME loan or liquidate your savings, it makes sense to go with the first option.
Source: Freepress Journal