Since its inception in the 6th century BC, the concept of banking evolved from being just an entity offering basic services to a fully matured system capable of providing an assortment of new services. Then non-banking financial institutions or NBFIs entered the field to mitigated the limitations of banking sectors. Together they made a system that is more structured and well defined with services including accepting deposits, lending money, investment, risk pooling, contractual savings, market brokering, and so on. Of all their primary services, providing loans to customers is one of the core functionalities of these entities. Depending on the needs, banks or NBFIs offer loans under two schemes- Retail loans and Small and medium-sized enterprises (SME) loans. But what do they mean and what the differences between retail and SME loans? Here in this article, we will be discussing the 5 most notable differences between these two in detail.
SME or commercial loan
SME loans or commercial loans are offered by banks and NBFIs for funding small and medium-sized enterprises or businesses. That is to say, as far as Bangladesh is concerned, if your business is successfully running at least for two years or so, it is considered as an SME. Commercial loans are specially designed for funding different aspects of a business.
Retail loan
Also known as personal loan, retail loans are given to an individual and are particularly designed for funding personal needs such as purchasing assets like property, vehicles, consumer electronics, and so on.
Now that we have cleared what these loans are and who these loans are for, we can discuss the differences between SME and retail loans. Here is a head to head comparison of these two types of loans.
Source of the loan
You can source retail loans from pretty much any major bank or national mortgage lender. It doesn’t depend on the location of your job or where you live in the country. In contrast, commercial loans are dependant on the location of your business and tend to be from local banks. So, for example, if you are buying something in Sylhet, you’ll want to start developing a relationship with a local bank that is headquartered in that city.
Amortization period
One of the notable differences between SME and retail loans is the amortization period or the length of the loan. In Bangladesh, most banks offer a loan repayment tenure of 30 years or even more (depends on the banks and their terms and condition) for personal loans. But compared to that, commercial loans are often amortized over a shorter period of time. For any financial institution, it’s less risky for them to lend a shorter-term loan and they get higher payments every month as well.
Fixed vs. Variable interest rates
Although the Bangladeshi government has fixed a single-digit interest rate for all kinds of loans (except credit card), this may change in the future. And when it will, everything may go back to where it was before. That is to say, residential loans typically have a fixed interest rate over 30 years. But there are banks and NBFIs that offers variable rate interest rate as well. In a fixed interest rate, your interest rate and payment stay exactly the same.
Commercial loans, on the other hand, tend to have variable rates. Meaning, your interest rate gets tied to some standard index and goes up and down along with the index. As with a shorter amortization period, this lowers the risk for the lender because if the interest rates skyrocket, so will your payment.
Down payment
Among other noteworthy differences between SME and retail loans, downpayment is another differentiating factor. With residential loans, you may have to put down 25% or 30% max. With commercial loans, you may be required to put down even more. Especially if you don’t have a good banking relationship with the lender. This is why it’s important to build relationships with local banks if you want to keep things in your favor.
Eligibilities
With residential loans, your qualification for the loan largely depends on you and your income. Most banks will sanction a home loan if your monthly income crosses thirty thousand and more. In contrast, commercial loans are much more about the business and the income it generates. However, the more income a business generates, the less important your income becomes.
While commercial loans and residential loans may have some common points, they are still very different. Not only do they structured differently, they are also designed to yield different results. SME loans are for businesses that show promise to grow even bigger in the future whereas retail loans are for the general public.
