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What Is An MSME Business Loan? Its Types, Benefits, Requirements, Eligibility & How To Apply?

About MSME Business Loan in India

To emerge as a viable market in the global economy, India has started to establish policies and procedures to attract investors from various countries. As a critical source of employment for many, micro, small, and medium businesses need a hand to reach their full potential.

Considering that India is known for its local businesses and arts, promoting the MSME sector will only grow the GDP of the nation. The Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006 was passed in hopes to bring up the MSME sector. Be it the manufacturing or service enterprises, the MSME sector needs the assistance of governmental bodies to grow and innovate.

Learn more about – What Are MSMEs? Definition, Benefits, Registration Process And Classifications Explained

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What is an MSME Business Loan?

Uplifting the small-scale and medium-scale industries in the country has been a goal of the Indian government for decades. Set up by the Government of India and RBI in efforts to promote micro, small, and medium business enterprises, the MSME business loan is a form of assistance that these enterprises receive. With an added benefit of being an unsecured loan, this rather easily granted loan scheme ensures support for entrepreneurs in terms of finance, infrastructure, and other areas as well. Be it business expanding, establishment, or for meeting expenses, the MSME business loan can be availed of with the right documents and application process.

Since the scheme was set up by the Government of India, SIDBI, and the Ministry of MSME, factors like project viability are given consideration when financial institutions review loan applications. The feature of collateral-free loans that are secure only on the assets financed has encouraged more MSME to benefit from this scheme. However, there are established criteria by various institutions that every enterprise should meet in order to be granted financial assistance in their venture.

Learn more about – Difference Between Banks and NBFCs – Which is Good for MSME Loan?

Types of MSME Business Loans

  • Pradhan Mantri Mudra Yojana (PMMY) provides up to 10 lakh to non-corporate and non-farm small or micro-enterprises. According to this scheme, loans are classified as MUDRA (Micro Units Development and Refinance Agency Limited) loans. Provided by commercial banks, small finance banks, MFIs and NBFCs, borrowers can approach these lending institutions or apply for loans online. The loans are doled out after considering the phase of development the establishment is in as denoted by the ‘Shishu’, ‘Kishore’ and ‘Tarun’ schemes.
  • Credit Guarantee Trust Fund for Micro & Small Enterprises (CGT MSE) was introduced with an aim of providing financial assistance to the small and medium industries without any third-party guarantee or collateral. With a guarantee cover extending from 50% for retail activity to almost 85% for micro enterprises, entrepreneurs can approach select rural banks and financial institutions to avail of this financial aid. In case of default, the trust settles up to 75% of the amount.
  • Prime Minister’s Employment Generation Programme (PMEGP) loan is another scheme implemented by Khadi and Village Industries Commission (KVIC) for MSME. As a credit-linked subsidy scheme, the loan is granted to prescribed groups for the establishment of businesses where 15-35% of the project cost is taken care of upfront and the rest is disbursed at regular intervals.
  • Credit Linked Capital Subsidy Scheme (CLCSS) is a way for MSME to catch up with the rest of the world and update their technology. For incorporating state-of-the-art technology in the business practice, the scheme provides from 15% subsidy for additional investment up to Rs.1 crore.
  • Equity Infusion for MSMEs through Fund of Funds is a scheme to support MSME in their growth stage. Providing funds to underserved MSME with growth potential, an intervention in the form of equity is staged.
  • SIDBI Make In India Loan For Enterprises (SMILE) was put forward to promote the Government of India’s ‘Make in India’ campaign with MSME. providing soft loans on quasi-equity, it helps the deserving enterprises meet the debt-equity ratio. Financing smaller establishments is the major goal here and the repayment period is up to 10 years, including moratorium of up to 36 months.

Learn more about – Top 5 Government Schemes For Startups And MSMEs In India

Benefits of MSME Business Loan

As a micro, small, or medium business, getting an MSME registration is one of the best decisions you can make in favor of your business. With a few documents like business address proof, copies of purchase and sale bills, and licenses from regulatory bodies, your business can hold an MSME registration. With this, your enterprise can avail of loans from banks without any collateral, receive income tax exemption, industrial promotion subsidy, protection against delayed payments, reimbursement of ISO certification, and even concessions in electricity bills.

Learn more about – What Is MSME Udyam Registration? Step-By-Step Process Of MSME Registration

As an MSME registered business enterprise, by applying for loans under the scheme, you get to enjoy the following benefits:

  • For the most part, you get collateral-free loans. Slight changes in policies may occur due to differences in the financial institutions or the details of your establishment.
  • MSME business loans are quickly approval via online portals and the loan amount is deposited soon. You can also manage the loan easily from the net banking website of your financial provider.
  • As a part of MSME schemes, establishments get a subsidy on patent registrations. Since the Government of India is constantly encouraging small businesses to innovate and work on new projects, this subsidy on patent registration has proven to be very effective.
  • Most of the schemes put forward for the benefit of MSME offer overdraft interest rate exemption to secure the business during unfavorable markets. However, the rates and tenure may vary from bank to bank and scheme to scheme.

Learn more about – Benefits Of MSME Registration In India

Eligibility and Requirements for MSME Loan Application

The eligibility criteria for MSME loan application has become more relaxed than before. Even though the guidelines change from bank to bank and for each scheme offered, there is a general idea of a criteria that is applicable everywhere. For instance, the type of business you own is the first criteria considered. If your business comes under the service sector or the manufacturing sector, the processes followed for each and the loan amount allowed may vary.

Learn more about – Which Business Comes Under MSME? Explore the Complete List of MSME Businesses

The size of the business is also evaluated before approving loans. Generally, micro-businesses can get a loan from Rs.10 lakh up to Rs.25 lakh depending on the kind of business. Similarly, small businesses can receive any amount reaching Rs.2 crore to Rs.5 crore. Medium-sized businesses can get loans of Rs.5 crore to Rs.10 crore without a hitch if all the documents and application process have no complications.

To receive an MSME business loan in India, you need to hold Indian citizenship. Individuals from the age of 24 to 70 years are eligible to apply for an MSME busiess loan and must be either a self-employed professional, a self-employed non-professional, or a part of a business entity. The business enterprise for which the loan is being granted should have a history of at least three years and a CIBIL score of 685 or higher is usually appreciated.

Learn more about – How To Get MSME Loan For New Businesses? Explore The Loan Schemes For MSME Businesses

How to Apply for MSME Business Loan?

Once you have made sure that your business meets the eligibility criteria and you have all the documents that are necessary to apply for an MSME business loan, you can proceed to file your application. You can either visit the nearest branch for making an application or complete the process online.

  • Step 1: To start the process, find the form for the MSME business loan application by your chosen finance provider.
  • Step 2: Following this, you will have to enter some basic information. It may include your phone number and date of birth as is displayed on the PAN card. Filling these details rounds up the first leg of your application process.
  • Step 3: Next, you have to fill in the business details and your income information. You will be required to share details regarding your venture and other bits of information such as your income and turnover, among others, along with your yearly income for the bank to assess your eligibility.
  • Step 4: The bank or the finance provider will also require your business PAN and related information. As the fourth step, you will be asked more questions about your business, its functioning, other loans you might have, and so on.
  • Step 5: Weigh the MSME business loan offers. After you fill out the above details, you will be shown the maximum amount that you can avail by way of an MSME business loan from the finance service provider. Here you can see the monthly EMI that you have to pay, inclusive of the interest rate, and other minor details that require your attention.
  • Step 6: Finalize the MSME business loan by selecting one of the offers or packages from your finance provider and choosing the tenure for repayment.
  • Step 7: Acknowledgement and verification is the final step and then you have successfully applied for an MSME business loan. Be sure to go over the loan amount, and the payment tenure of choice, and details that will be shared with the finance partner. As soon as you receive an online confirmation regarding the approval of your application, you can expect the loan amount to reach your account within a few working days.

Learn more about – How To Apply For Government Loan Schemes & Subsidies For Small Business In India?

Summing it up

India is a nation that has the potential to grow in the global market. Considering that the resources are plenty in India, the entrepreneurs of the country need the right kind of encouragement and assistance to flourish. The MSME loan scheme that has been established by the authorities is a great way to boost the up-and-coming businesses in the country.

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