IMPORTANT QUESTIONS TO ASK YOUR NBFC BEFORE AVAILING AN SME LOAN

• Publish on Feb 01, 2025
• Read Time 5 min

Getting a small and medium enterprise (SME) loan is a crucial part of expanding your company. You can always opt for additional financing by giving your financial needs to a Non-Banking Financial Company (NBFC) to finance your current and future needs, which you should consider. But before diving into the application process, it is important to familiarize yourself with the conditions of the loan. However, asking the right questions can be a game changer for your borrowing and financial planning experience. Here we discuss key questions to ask your NBFC before applying for an SME loan so that you are fully equipped to make sound decisions.

Knowing the loan limits will allow you to determine if the amount satisfies your business requirements. If you are seeking a small working capital loan or a bigger figure for expansion, it makes all the difference to know the upper and lower limits before making a business decision.

What Are Interest Rates and How Are They Set?

One of the most important things to consider when taking an SME loan is the interest rates. NBFCs provide attractive rates, but in this case, it varies widely based on several determinants. Factors include creditworthiness of your business, the type of loan, and the repayment tenure. Cost of funds: While NBFCs can provide you with a fixed-rate loan, some of them will offer you a floating rate loan. Be sure to inquire about the structure of the interest rates and whether it is subject to change over time. This will help you calculate your loan repayment schedule correctly.

What Are the Eligibility Criteria for an SME Loan?

Well, every NBFC has different scoring, and it often depends on the health of your business, your credit score, and the type of collateral you can provide or what you can pledge (if any). Some lenders may also impose revenue or business history requirements. Familiarizing yourself with these eligibility requirements will allow you to assess your qualification for a loan. You should be aware of these factors so you can either strengthen your approval odds or investigate alternative financing options.

What Is the Repayment Structure and Tenure?

It is important to understand the repayment terms so that you can plan for your loan without overstraining your cash flow. Inquire from the NBFC about loan tenure (the duration in which you will repay the loan) and if they provide flexible repayment options. Many lenders allow for monthly payments toward debt repayment, although some, depending on your industry, may even go as far as to establish quarterly or annual repayments. Also, ask about prepayment or early settlement — this could give you a chance to save on interest if you decide to repay the loan early.

What Are the Extra Fees and Charges?

SME loans also demand multiple processing fees, documentation charges or overdue payment penalties apart from interest. These fees can compound and impact the overall loan costs. So, it is important to get clarification on all charges related to the loan in advance of making a commitment to apply. Watch out for hidden fees – which are additional charges that lenders may impose outside of your normal payment schedule, these may include but are not limited to loan processing fees, overdue payment fees and administrative fees.

What Documentation Do I Need for the Loan Application?

Depending on the NBFC, the paperwork needed for an SME loan application differs. The lender does require several pieces of information such as business details, financial statements and tax return statements, ownership or lease paperwork on business premises, and personal identification. If you are providing collateral for the loan, you may have to submit the collateral documents to some NBFCs. If you know about the documentation checklist at the beginning of the process, you can keep everything ready and walk into the application process with confidence.

Do I Need Collateral for the Loan?

These collateral requirements will differ between lenders. While some NBFCs offer unsecured loans where no assets need to be put down as collateral, some NBFCs may cover their risk in lending by accepting assets as collateral. If you need to provide collateral, you should inquire about what kinds of assets can be placed as security, as well as their estimated value. Knowing this will help you determine if you will be able to meet the collateral requirements or if you should seek financing through alternate means.

How Long Does the Loan Approval Process Usually Take?

One of the other crucial factors you need to keep in mind when you apply for an SME loan is the time taken for loan approval. Banks can often take weeks to approve a loan, while NBFCs tend to have more flexibility and make decisions faster. Nonetheless, the time frame is still subject to variance based on NBFC and the intricacies of your application. Request a definitive timeline of how long it will take to get approval and the funds in hand. This is particularly critical if you require access to funds immediately for your business operations.

Is There Prepayment Penalties or Hidden Clauses?

Just be sure to ask about prepayment penalties or any other unnecessary clauses before you agree to a term. Pre-closure charges: Certain NBFCs can charge pre-payment or pre-closure fees, which means if you pay off your loan early, it can end up being more expensive than what was expected. Read the fine print, always, and do not hesitate to ask questions about any conditions that might compromise your flexibility.

Does the NBFC Have a History of Lending to SMEs?

Finally, consider doing some research on the NBFC's reputation. Read online reviews, check if other small businesses owners have positive experiences, and their history of lending to SMEs. A good lender will communicate clearly, offer competitive rates, and be dedicated to helping small businesses with flexible financing options. A lender with a track record of fair lending and that is willing to make sure both you and your business succeed is what you want.

By asking these key questions, you can make an informed financial decision that promotes the growth of your business and avoids pitfalls in the process.

1. What are the eligibility criteria for Ecofy’s green SME loans?
   Understanding if your business qualifies for Ecofy’s sustainability-focused financing can help streamline your application.
2. What sustainable sectors or projects does Ecofy prioritize for financing?
   Since Ecofy focuses on eco-friendly initiatives, knowing their preferred industries (e.g., renewable energy, waste management, green mobility) can improve your chances of approval.