MSME loans, also known as micro, small, and medium enterprise loans, provide financing to small businesses and entrepreneurs. These loans help MSMEs meet their working capital needs and business growth goals through accessible credit. Read on to understand what MSME loans are, their key features, eligibility criteria, and how to apply for them.
Definition of MSME
The MSME sector is critical for India’s economic development, comprising over 60 million enterprises. The definition and classification of MSMEs are based on investment in plant and machinery or equipment and annual turnover.
In May 2020, the Government of India revised the MSME definition as:
Enterprise type | Investment limit | Turnover limit |
Micro | Less than Rs. 1 crore | Less than Rs. 5 crore |
Small | Less than Rs. 10 crore | Less than Rs. 50 crore |
Medium | Less than Rs. 20 crore | Less than Rs. 100 crore |
So, manufacturing and service enterprises fitting these criteria are eligible for MSME benefits like priority sector lending, subsidies, tax benefits, etc.
What is an MSME loan?
An MSME loan is a type of business financing extended to MSMEs. Both banks and NBFCs provide MSME loans to meet working capital, cash flow, procurement, business expansion and other needs of MSMEs.
MSME loans are categorised as priority sector lending. They make access to organised credit easier for small business owners.
Features and benefits of MSME loans
- Collateral-free loans up to Rs. 10 lakhs
- Minimal documentation and quick processing
- Competitive interest rates
- Flexible repayment tenures
- Loans for new and existing MSMEs
- Funds for any business purpose working capital, procurement, expansion, etc.
MSME loans help entrepreneurs secure capital for growth without complex financing processes. This spurs expansion, job creation, and economic development.
Types of MSME loans
MSME loans are offered in various forms to suit different requirements.
- Term loans – For long-term capital expenses like equipment purchase.
- Working capital loans – For short-term needs like procuring inventory.
- Overdraft facility – For urgent working capital needs.
- Cash credit – Revolving line of credit for working capital.
- Bill discounting – Raising funds against invoices/receivables.
Eligibility criteria for MSME loans
The broad eligibility norms for MSME loans are mentioned as follows:
- Business entity must be an MSME as per definition
- Minimum 1-3 years in business
- Annual turnover as per MSME category
- Good credit history
- Ownership proof and KYC documents
Specific eligibility and documents required depend on the lender. Manufacturing, services, and trading MSMEs can apply subject to meeting criteria.
Interest rates and other charges
Interest rates on MSME loans range from 10% to 20% p.a. based on the lender, loan amount, applicant’s profile, and other factors. Processing fees up to 2% may apply. Other charges like prepayment penalties, foreclosure charges, insurance, etc. may be levied. Compare interest rates across lenders carefully.
How to apply for MSME loans?
MSME loans can be applied through different channels:
- Online – On the lender’s website by submitting the application form and documents.
- Branch visit – By procuring the application form and submitting documents at the branch.
- Direct sales agents – Authorised DSA networks also facilitate MSME loan applications.
The documents required are KYC, business proof, MSME certificate, financial statements, etc. Many lenders have expedited digital processes for faster approvals.
Conclusion
MSME loans are collateral-free credit facilities extended by banks and NBFCs to micro, small and medium enterprises. They support the growth of MSMEs through easy access to financing. Understanding the features, eligibility, documents required, and application process enables entrepreneurs to secure funding smoothly. Comparing interest rates and charges across lenders is advised to get the best deal on MSME business loans.