Overview
MSME loans are a type of financing provided to small and medium enterprises (SMEs) in India. These loans are designed to help SMEs grow and expand their businesses. There are a number of different types of MSME loans available, each with its own set of features and benefits.
The most common type of MSME loan is the term loan. This is a traditional loan that can be used for a variety of purposes, such as working capital, equipment purchases, or expansion. Term loans typically have fixed interest rates and repayment terms of 2-5 years.
Another popular type of MSME loan is the line of credit. This is a revolving credit facility that can be used for any business purpose. Line of credit products typically have variable interest rates and offer more flexible repayment terms than term loans.
There are also several specialised types of MSME loans available, such as those for women-owned businesses, minority-owned businesses, or rural businesses. These product offerings may have different eligibility requirements and terms than other MSME loans.
MSME Loan – Highlights – 2023
Micro, Small and Medium Enterprises (MSMEs) are the backbone of the Indian economy, contributing over 30% to the country's GDP and providing employment to over 11 crore people. To support the growth of MSMEs, the Government of India and various banks and financial institutions offer a range of loan schemes and products.
MSME Loan Schemes initiated by the Govt. of India
The Government of India has launched several loan schemes for MSMEs, including:
- Pradhan Mantri Mudra Yojana (PMMY): This scheme provides loans of up to Rs. 10 lakh to micro and small enterprises.
- Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): This scheme provides collateral-free loans to MSMEs.
- Stand Up India Scheme: This scheme aims to facilitate loans of between Rs. 10 lakh and Rs. 1 crore to women entrepreneurs and borrowers from SC/ST communities.
- Prime Minister's Employment Generation Programme (PMEGP): This scheme provides loans to unemployed youth and women entrepreneurs for setting up new businesses.
MSME Loan for Existing Businesses
MSMEs can avail MSME loans for a variety of purposes, including:
- Business expansion
- Working capital requirements
- Purchase of machinery and equipment
- Construction of new premises
- Renovation of existing premises
Types of MSME Loans
There are two main types of MSME loans:
- Secured loans: Secured loans require the borrower to pledge collateral, such as property or machinery, to the lender.
- Unsecured loans: Unsecured loans do not require any collateral. However, the interest rates on unsecured loans are generally higher than those on secured loans.
Manufacturing and Service Enterprises
There are two types of enterprises in India, manufacturing and service. Manufacturing enterprises are those that engage in the production of goods, while service enterprises provide services.
MSME loans in India can be used for both manufacturing and service enterprises. The benefits of MSME loans include easier access to credit, lower interest rates, longer repayment tenure, and collateral-free loans.
MSME loans can be used for a variety of purposes, such as working capital, machinery purchase, business expansion, etc. Whether you're a manufacturer or a service provider, an MSME loan can help you grow your business.
MSME Loan Interest Rates by Top Banks in 2023
The following table shows the MSME loan interest rates offered by some of the top banks in India in 2023:
| Bank | MSME Loan Interest Rate |
|---|---|
| State Bank of India (SBI) | 10.25% - 16.25% p.a |
| HDFC Bank | 11.75% - 17.75% p.a |
| ICICI Bank | 12.25% - 18.25% p.a |
| Axis Bank | 12.50% - 18.50% p.a |
| Kotak Mahindra Bank | 13.00% - 19.00% p.a |
MSME Loans
The Micro, Small and Medium Enterprises (MSME) sector is the backbone of the Indian economy, contributing significantly to its manufacturing output, exports and employment. The MSME sector comprises more than 63 million units and provides employment to over 111 million people.
Despite its importance, the MSME sector has been struggling in recent years due to a number of factors including the slowdown in the global economy, rise in input costs and stringent lending criteria of banks and financial institutions. This has resulted in a significant increase in the demand for MSME loans from small businesses across India.
There are a number of government schemes and initiatives that have been launched to support the MSME sector. One such scheme is the Pradhan Mantri Mudra Yojana (PMMY), which provides collateral-free loans of up to ₹10 lakh to small businesses. However, due to the large number of applicants, the approval process for PMMY loans can be quite lengthy.
Banks are also offering several specialised loan products for MSMEs which come with relaxed eligibility criteria and attractive interest rates. However, most of these loans require collateral or a third-party guarantee.
If you are an entrepreneur looking for financing for your small business, it is important that you compare different loan options before applying for one. You should also keep in mind that availing an MSME loan can have an impact on your personal credit score, so it is important to repay your loan on time.
Benefits of MSME Loans
1. Easy to Obtain: MSME loans are relatively easy to obtain, especially when compared to other types of business financing. Banks and financial institutions are typically willing to lend to small businesses, and the application process is generally straightforward.
2. Competitive Rates: Interest rates on MSME loans are usually very competitive, especially when compared to personal loans or credit cards. This makes them an affordable option for businesses looking to finance their operations or expand their reach.
3. Flexible Repayment Terms: MSME loans typically come with flexible repayment terms, which can be customised according to the borrower's needs and ability to repay. This makes them a convenient financing option for small businesses.
4. Collateral-Free: Many MSME loans are offered without any collateral requirement, making them accessible to businesses that may not have the required assets to pledge as security.
5. Wide Range of Uses: MSME loans can be used for a wide range of purposes, including working capital requirements, business expansion, purchase of equipment/ machinery, and more. This makes them a versatile financing option for small businesses.
Checklist for MSME Loan Eligibility
1. Business must be registered as an MSME
2. The business should have a sound financial history
3. The business should be running profitably for at least 2 years
4. The promoter's credit score should be good
5. The business should have a strong track record
6. The loan amount should be within the eligible limits
How to Calculate MSME / SME Loans EMI?
The EMI (Equated Monthly Installment) of an MSME loan can be calculated using the following formula:
EMI = P * R * (1 + R)^N / ((1 + R)^N - 1)
where:
- P = Loan amount
- R = Monthly interest rate (i.e., annual interest rate / 12)
- N = Number of EMIs
Apply for MSME Business Loan Online
MSMEs can apply for MSME business loans online through the websites of banks and NBFCs. The online application process is generally quick and easy, and borrowers can get loan approval within a few days.
How to Choose the Ideal MSME Loan Scheme
1. Consider Your Business Needs: Before you start looking at loan schemes, it's important to think about what your business needs. What are your short-term and long-term goals? How much money do you need to borrow? What can you afford to repay?
2. Do Your Research: Once you know what you need, it's time to start researching different loan schemes. Compare interest rates, repayment terms, eligibility criteria and other important factors.
3. Consider Government Schemes: The Indian government offers several loan schemes for MSMEs. These can be a good option if you meet the eligibility criteria.
4. Talk to a Financial Advisor: A professional financial advisor can help you understand your options and choose the best loan scheme for your business.
5. Compare Online Lenders: There are many online lenders that offer loans for MSMEs. Compare their offers to find the best deal for your business.
Documents Required While Applying for an MSME Loan
There are a few documents that you will need while applying for an MSME loan in India:
- Your business registration certificate
- Your tax return filings for the last 2 years
- Your bank statements for the last 6 months
- A detailed business plan
- Financial projections for the next 3 years
- Collateral (if any).
Why Vakilsearch?
You can get started with your loan application in just a few minutes, and our team will guide you through every step of the process. We'll help you compare different loan options and choose the one that's best for your business.
We're committed to helping small businesses grow, and we have a proven track record of success. We've helped thousands of businesses secure funding, and we're ready to help you too.
FAQs on MSME Loans
1.Choose a lender. You can compare the interest rates and terms offered by different lenders online or through a financial advisor.
2.Fill out an application form. The application form will typically ask for your personal and financial information, as well as information about your business.
3.Submit the required documents. You will need to submit copies of the required documents to the lender.
4.Get your loan approved. Once the lender has reviewed your application and documents, they will decide whether to approve your loan.
5.Sign the loan agreement. Once your loan is approved, you will need to sign a loan agreement with the lender.
6.Receive your loan amount. Once you have signed the loan agreement, the lender will disburse the loan amount to your bank account.
Confused about your next step?
Get guidance from our senior lawyers who can understand your situation and help you make an informed decision.
