The micro, small, and medium-sized enterprises (MSMEs) are the growth engines of the Indian economy. These businesses have contributed immensely towards India’s rapid economic growth during the past few years. As per the Central Government’s data, there are approximately 12 crore MSMEs in India, contributing to around 29.2% of India’s Gross Domestic Product (GDP).
Read on to explore the significance of MSME loans and their profound impact on fostering entrepreneurship, especially for small business owners.
MSME Sector in Business
MSME or Micro, Small and Medium-sized enterprises are primarily engaged in the production, manufacturing, and processing of goods and services. This classification was established by the central government in 2006 under the Micro, Small & Medium Enterprises Development Act.
- Micro Enterprise: A business entity is termed as micro if it has an investment of worth less than INR 1 crore and a turnover of less than INR 5 crore.
- Small Enterprise: A business entity is termed as small if it has an investment of worth less than INR 10 crore and a turnover of less than INR 50 crore.
- Medium Enterprise: A business entity is termed as medium when the amount of investment is less than INR 20 crore along with a turnover of less than INR 100 crore.
Importance of MSMEs for the Indian Economy
MSMEs form a crucial part of the supply chain and contribute around 40% to India’s overall exports. They also play an integral role in generating employment in the country. They employ approximately 11 Crore people from various parts of India. Interestingly, they have been equally responsible for the country’s rural development as well. More than half of the MSMEs are based in rural areas of India.
However, despite being an integral part of India’s development, these MSMEs face enormous threats and challenges to their survival and growth. One of the significant challenges they face is the lack of sufficient financing. Due to this, most of them cannot access newer technology and infrastructure and, therefore, remain in their micro cycle only. As per a report, MSMEs in India suffer from low productivity, limited efficiency, and inadequate workforce.
Importance of MSME Loans for Small Businesses
The MSME sector is one of the most significant contributors to India’s overall economic and social development. However, the lack of access to financing avenues can dampen their spirit and prevent their growth. As per a report by the Association of Certified Chartered Accountants in India (ACCAI), 80% of MSMEs in India lack access to formal business credit. The decline in economic activities during the COVID-19 lockdowns escalated this problem even further.
Therefore, an MSME Loan becomes vital for small business owners. Understanding the importance of loans in business is crucial as it can help MSMEs sustain through difficult business cycles. It also allows them to maintain their productivity and efficiency. Besides, it also provides them with financial assistance to continue their day-to-day business activities without any hassle.
For an MSME, the importance of financial assistance is often highlighted. There are several other reasons why MSME Loans are crucial for small business owners in India. Let’s have a look at them to fully understand the importance of MSME loans.
Also Read: 5 Easy Ways To Fast Pay Off Your Business Loan Efficiently
Role of MSMEs in Employment Generation
As per the Ministry of MSMEs, these enterprises contribute about 30% to the GDP and employ roughly around 11 crore individuals. Compared to larger industries, MSMEs have the potential to create more jobs due to their lower capital requirements and higher employment rates.
There are numerous examples of MSMEs that started as a micro business and emerged as large corporations employing millions. For example, the AMUL Dairy Cooperative in Gujarat, which began as a small cooperative in the 1940s, has evolved into a thriving MSME employing millions of people.
Challenges and Support for MSMEs
There are several obstacles that MSMEs face when it comes to job creation, such as lack of funding opportunities, outdated technology, shortage of skilled workforce, inadequate infrastructure, compliance issues, and lack of access to markets.
To support and encourage MSMEs in the country, the Government of India has launched several initiatives like Atmanirbhar Bharat. These efforts aim to provide financial aid, marketing assistance, technology upgrades and simplify business processes.
Advantages of MSME Loan (in Non-Government)
Check Out the Most Common Advantages of An MSME Loan:
- Easily Accessible
One of the most distinct advantages of MSME loans is that they are easily accessible. As mentioned above, there are several ways through which a small business can access an MSME loan. For instance, they can approach a traditional bank or an NBFC, or a Government-appointed nodal agency and authorised financial institution to apply for credit under an MSME loan.
- Quick Disbursal
MSME loans are usually disbursed very quickly by lenders. Generally, lenders don’t take more than a week to disburse MSME loans. Some lenders even disburse them within a day or two. For example, with the Government’s “MSME Loan in 59 minutes” scheme, one can get access to finances in as quick as 59 minutes. This happens because MSME loans are collateral-free and hence, they don’t involve a lengthy verification and inspection process. Also, the eligibility criteria and documents required for MSME loans are very simple which helps the lenders in disbursing these loans quickly.
- Tackles Cashflow Requirements
Sudden shortages of cashflow can prove to be detrimental for any business. However, an MSME loan can be of great help in such situations. A small business owner can avail of an MSME loan and tackle the seasonal shortage of cashflow with ease.
- Best Suited for Short-term Requirements
The financial requirements of small businesses range from long-term to short-term. Long-term requirements include expansion or renovation of business premises, up-gradation of equipment and technology, etc. Short-term requirements usually include tackling working capital shortfalls, paying wages to employees, procuring raw materials, etc.
While long-term requirements need substantial working capital, business owners can easily meet their short-term requirements through MSME loans. Features like shorter tenures, flexi loan limits, and flexible repayment options make these loans best-suited for the short-term requirements of small businesses.
- Owners Remain in Complete Control of Their Business
Another benefit of MSME loans is that they allow small business owners to keep complete control of their businesses in their hands only. If they try to raise capital through other methods, such as angel investors and venture capitalists, they might have to give up a chunk of equity ownership in their venture. However, the case is not the same with MSME loans. Lenders don’t interfere at all in business activities after providing MSME loans. All they care about is the repayment of the loan in a timely fashion.
- Affordable Rate of Interest
In a competitive business environment, every penny counts. The more money business owners have in their hands, the better positioned they are to take risks and make profits. With competitive interest rates, MSME loans are designed to make financing accessible and affordable for small business owners. This ensures that they can continue with the business expansion activities without feeling the burden of repaying a high-interest loan.
Also Read: 6 Possible Ways To Lower Your Business Loan Interest Rate
How to Get an MSME Loan for Business?
Every small business owner need access to finances at various stages of growing their business. Here is a list of the various ways in which a small business can get an MSME loan in India:
1. Banks
Banks are the most
traditional form of lenders that provide MSME loans for small
businesses in India. One can approach any private or public-sector
bank to avail of an MSME loan. However, banks have very strict
eligibility criteria for providing these loans. Their
documentation and verification processes for approving MSME loan
applications are also quite lengthy.
2. Non-banking Financial Companies (NBFCs)
NBFCs or Non-banking financial companies are entities or
institutions that offer similar services to that of a bank but do not
hold a banking license. Most of these NBFCs provide collateral-free
MSME loans to small business enterprises. There are several advantages
of choosing NBFCs over banks for availing of an MSME loan, such as:
- NBFCs usually have flexible eligibility criteria for approving MSME loan applications as compared to banks.
- Also, the interest rates levied by NBFCs may be comparatively lower.
3. Government’s Credit Schemes
The
central Government of India and various State Governments have
introduced several credit schemes to help MSMEs grow and flourish.
To avail of funding through any of these schemes, one needs to
approach the authorised financial institutions or central nodal
agencies appointed by the Government to manage their schemes.
The primary benefits of availing of an MSME loan under the Government schemes are that they are reliable, easy to get, and come with very low interest rates. The purpose of these loan schemes is only to help small business owners. The Government usually provides MSME loans under these schemes at subsidised interest rates. Some of the top Government-backed Business Loan schemes for MSMEs in India are:
- Pradhan Mantri MUDRA Yojana (PMMY)
- Credit Linked Capital Subsidy Scheme (CLCSS)
- Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE)
- National Small Industries Corporation (NSIC) Subsidy
- PSB/MSME Loan in 59 minutes
- SIDBI Make in India Soft Loan for Micro, Small, and Medium Enterprises (SMILE)
- Start-up India, Stand-up India, and Make in India
To Conclude
An MSME loan can be an excellent instrument for small business owners to grow and expand their businesses. With features like quick disbursal, flexible repayment tenure, and affordable interest rates, MSME loans can help small enterprises meet their exact needs during various stages of their growth.
Poonawalla Fincorp provides a Small Business Loan to help the MSMEs in India grow and flourish. With Poonawalla Fincorp’s Small Business Loan, you can avail of high loan amount and enjoy benefits such as flexible repayment tenure, no collateral requirement, minimal documentation, etc.