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What are the Benefits of an MSME Loan?

Are you thinking about applying for an MSME loan? Read this blog to know about the benefits of the same

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MSME loans are collateral-free, offer quick approval, and the extended tenure may range from anything between 12 to 60 months. These are just a few of the benefits of an MSME loan. However, in this blog, we will discuss about a few more benefits of the same in detail. read on! 

Micro, Small and Medium Enterprise (MSME) loans can be defined as loans that various financial institutions provide to the entrepreneurs to help them meet business-related expenditures. According to the Government of India and the Reserve Bank of India, these loans can be availed by business enterprises that fall under categories like micro-enterprises, small enterprises, and medium enterprises (Exhibit I). MSME loan can be availed for a maximum period of 15 years. 

Limit of Loan Disbursals in Small Managed Enterprises

It is essential to know that various business enterprises are entitled to different loans. Financial institutions, for instance, had specified loan disbursement amounts to the enterprises based on the categories as directed. For example, micro-managed enterprises can claim 25 lakh of financial support if the business is operating in the manufacturing segment. 

Similarly, small managed enterprises can claim approximately 25 lakh to 5 crores from the investors if they operate in the manufacturing segment. This amount may vary in the services market. Therefore, a small managed business operating in the services market can be eligible for about 10 lakh to 2 crores of loan disbursals, depending on the company’s nature. Five crores have been justified to be a threshold amount for the micro-managed enterprises operating in any particular market.

Why Should a Business Take MSME Loan? 

Business owners can take MSME loans for various reasons. Some of them are as follows: 

  • To meet the growing need for working capital
  • For the expansion of business
  • For managing cash flow in business
  • For purchasing new equipment and machinery or upgrading the existing machinery
  • For purchasing raw materials
  • For purchasing vehicles and other fixed assets 
  • For hiring staff and providing training to the existing and new ones
  • For paying wages/salaries
  • For creating an inventory of raw materials
  • For the renovation of the business premises, etc.

Major benefits of MSME Loans

There are various advantages of taking MSME loans. Some of them include:

  • Accessibility: Timing is a significant factor, particularly if a business faces some unforeseen event and requires funds on an urgent basis. In fact, running a business can sometimes pose a challenging task due to a shortage of funds. Herein lies the benefit of MSME loans. Availing of MSME loans is not only easy but also hassle-free. Moreover, less documentation work is involved, and the loan amount is disbursed within a short period. 
  • Complete control: A small business needs to take care of the company’s financial needs while doing business, but obtaining finance is not an easy task. Though there are various other sources of availing loans like angel investors and venture capitalists, they try to control part of the company in return. Small business owners may be reluctant to lose control over their business, and for them, availing of MSME loans is the best option. MSME loans are ideal for business owners who want to do away with the liquidation of control.
  • Reduced interest rates: The interest rate plays a crucial role when a business owner wishes to apply for a loan. It is an essential factor in determining the loan’s overall cost and the monthly instalment. The monthly instalment amount is calculated based on the principal and the rate of interest. Hence, it is crucial to avail of the loan at a lower interest rate for affordable EMIs. An MSME loan usually has competitive interest rates and is best suited for small entrepreneurs.
  • No strings attached: Business owners require no collateral to be eligible for MSME loans. This is because small businesses are ‘asset-light’, and hence, they are not in a position to keep their equipment as collateral. If they pledge their valuable resources to banks for cash, it can badly affect their productivity if something goes wrong.
  • Short-term commitment: Small businesses usually take MSME loans to meet their short-term requirements. This arrangement offers some degree of flexibility to the borrower since there is no long-term commitment. A short-term commitment also helps the management manage cash flow better and effectively allocate available resources.
  • Flexible tenure to ease the repayment: One of the deciding factors which are very important for an applicant before availing of any loan is the convenience of compensation. A comfortable repayment tenure helps the borrowers manage their debt obligations better without defaulting on them. In this regard, MSME loans offer flexible repayment tenure, and hence, a business owner can plan his finances in a better way.

Eligibility Criteria for MSME Loans

Business owners who wish to avail of MSME loans will have to fulfil the terms and conditions to avail of the loan. They include: 

  • A business owner who wishes to apply for an MSME loan should have a turnover of ₹90,000 or beyond in the three months before application for the loan
  • The business owner will have to show documents like Business Registration and Proof of Permanent Address
  • The business should not be a blocklisted one
  • Income Tax Return documents to prove that the business owner is paying his taxes
  • Compliance certificates like GST and other registrations are also required
  • Income and expenditure documents of the business owner
  • Good payment history of the borrower also increases the probability of getting the loan
  • NGOs, trusts, or charitable institutions are exempted from MSME loans.

APPLY  FOR A MSME LOAN EASILY

Documents Required to Apply for an MSME Loan

A business owner who wants to apply for an MSME loan needs to have the following documents:

  • A proof of Identity which can include your Aadhar card
  • A residence proof including rental address or a ration card 
  • A valid business address which can be endorsed through a service agreement
  • Proof of Income can be submitted through a copy of the balance sheet from the business you own. 

Besides, applicants are requested to go through valid information and website sources to understand the implication of related documents which need to be submitted.

Conclusion

To sum it up, it can be said that the sole objective of providing MSME loans is to make sure that a lack of funds does not stop small businesses from growing and expanding. By helping the MSMEs grow and develop their business, MSME loans also promote economic development in India.

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