MSME loans are available for small businesses, start-ups and medium-sized companies. IIFL Finance offers more information about MSME loans.
In the last few years, India’s economic growth has been accelerated by micro, small and medium-sized businesses (MSMEs). They have played a crucial role in creating employment in India.
They play an important role in India’s development but also face huge risks and challenges for survival and growth. One of the biggest challenges they face is a lack of adequate financing. MSME loans are becoming more popular in recent years. This article gives an overview of MSME Loans.
What is an MSME loan?
Between 02.10.2006 and 30.06.2020 MSMEs were defined according to the investment made in manufacturing equipment and services equipment. On 26.06.2020 the Government of India released Notification No. S.O. S.O. According to the new definitions, criteria include investment in machinery and equipment and turnover limits. This applies uniformly for manufacturing and service businesses. The simplified criteria for MSME can be summarized as-
| MSME category | Investment | Turnover |
| Microscopy | You can earn up to Rs. 1 Crore | Maximum Rs. 5 Crore |
| Small | You can earn up to Rs. 10 Crore | Maximum Rs. 50 Crore |
| Medium (Revised). | Maximum Rs. 50 Crore | Maximum Rs. 250 Crore |
Working Capital Loan
Working capital loans help businesses to manage their daily operating expenses, such as purchasing raw materials, managing inventory, paying salaries, and repaying creditors. These short-term loan ensure smooth business operations by ensuring a smooth cashflow. Working capital loans come in many forms.
- Cash credit: This credit is based on your creditworthiness. Only the amount spent is subject to interest.
- Overdraft Allows businesses to withdraw amounts greater than the balance of their account, and charges interest for overdrawn amounts.
- Trade credit:It allows suppliers and vendors to extend payment deferrals for goods or services they have purchased.
- Invoice Finance: Businesses can sell their outstanding invoices at discounted rates to financial institutions for instant funds.
- Bank guarantee:A banking institution guarantees payment on behalf of a borrower to a third-party.
- Letters of Credit: The bank guarantees the payment to a recipient against certain documents.
- Point-of-Sale Finance: Retail businesses are the most likely to use this type of loan. The business is required to make future sales using debit or credit cards.
Lenders may require collateral such as shares, gold, land or property before they provide a working capital loan. Some lenders, however, offer MSME loans with no collateral after reviewing financial statements.
Term Loan
Term loans are used to finance long-term investments, like buying machinery, establishing or expanding an enterprise, and many other capital-intensive activities. These loans must be repaid in predetermined installments. Interest rates can be either fixed or floating. This means that the rate will change over time and follow a benchmark. Term loans can be classified as:
- Capital expenditure loans:These loans are used to purchase machinery, equipment or infrastructure.
- Project Term loan: These loans are used to help establish new manufacturing units and real estate developments.
Vehicle loan: This loan can be used to buy commercial vehicles.
SBA Loans could offer viable financial support for MSMEs, particularly when exploring diverse loan options. Understanding the eligibility for SBA funding can simplify the borrowing process for these businesses.
Other MSME Loans
With the growth of MSMEs, there is an increase in demand for MSME loan. Now, they offer flexibility in reshaping the loan if needed. Other specialized loan categories, such as:
- Equipment/Machinery loan: This is a loan that can be used to purchase machinery or equipment for upgrading technological capabilities and improving the operational efficiency of a business.
- Government-Sponsored MSME loans: Through schemes such as Prime Minister’s Employment Generation Programme, Credit Guarantee Funds Trust for Micro and Small Enterprises Trust (CGTMSE), Stand-Up India and Mudra Yojana, the government offers loans with concessional interest rates and favorable conditions.
Business loan for women entrepreneurs: The specialized MSME lending schemes are designed to help support women-owned MSMEs. The MSME loan rate is lower here than elsewhere, and the loan conditions are more favorable under this scheme.
Use of MSME loans
MSME loans can be used by small businesses for a variety of purposes.
- To meet requirements for working capital
- Improve the performance of your company
- Growth of innovative and new businesses
- How to manage the cash flow in a business
- Investing new equipment and machinery
- Purchase tools, vehicles and other fixed assets to the business
- Development of raw materials or stock inventories.
MSME Loans Offer Significant Benefits
There are many benefits to taking out a MSME loan. There are many benefits to taking out an MSME loan.
1. Accessibility
As a business owner, it can be difficult to fund a new business, maintain an existing one, or expand your business. The process for obtaining MSME loan is easy and convenient. The loan amounts are distributed quickly and with minimal documentation. This is especially true if you require them urgently.
2. Complete Control
Financing is an important part of the operations of small businesses, but it’s not always easy to get. Angel investors and venture capitalists can also provide loans but they often want a piece of the business in return. Small business owners who don’t want to lose control over their company should consider MSME loans.
3. Interest Rates Reduced
When calculating the total cost of a loan and the monthly installment, business owners must take into account interest rates. Calculate monthly installments based on the principal and interest. Take a loan with a lower rate of interest to get affordable EMIs. These loans are usually beneficial to small businesses because they offer competitive interest rates.
4. No collateral needed
MSME loans do not require collateral from business owners . Small businesses do not usually have many assets and therefore cannot use their equipment as a collateral. By taking out secured loans, they could be putting their precious resources at risk. This can negatively affect their productivity.
5. Short-term Commitment
MSME loans are used by most small businesses for short-term requirements. This arrangement allows for some flexibility to the borrower due to the absence of a long-term commitment. Short-term commitments also help managers better manage cash flow and resources.
6. Flexibility in the repayment period to ease the repayment
Borrowers can manage their debt obligations better without defaulting if they have a comfortable repayment period. MSME loans offer flexible terms of repayment, which allows business owners to plan their finances more effectively.
MSME Loans Eligibility Criteria
You must meet these criteria to qualify for an MSME Loan:
* Your credit score is higher than 750
* The business must have been in existence for at least one year
The minimum requirement for banks is Rs.12 lakh.
* Stability and a good history of repayment
* No previous loan defaults
Documents required for MSME loan
Documents required for MSME Loans
Documents of KYC approved by the government, such as Aadhaar, PAN, voter IDs and driving licenses.
Proof of address: Passport, rent agreement, or electricity bill
Financial statements of the business, such as GST returns, bank statements and profit and Loss statements for the past six months.
Documents of business registration as proof ownership
