MSME Loan for Small Business Owners

Importance of MSME Loan for Small Business Owners

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 that we have seen during the past few years. As per the Central Government’s data, there are approximately 6.3 crore MSMEs in India, contributing to around 30% of India’s Gross Domestic Product (GDP).

MSMEs form a crucial part of the supply chain and contribute around 40% of 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, with more than half of the MSMEs located in the rural areas of India.

However, despite being an integral part of India’s sustainable development, these MSMEs face enormous threats and challenges for 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, 99% of MSMEs in India suffer from low productivity, limited efficiency, and inadequate workforce.

The emergence of MSME Loan for small business owners

The Government of India has recognised the financial challenges faced by the MSMEs. It has decided to protect these drivers of the Indian economic growth by helping them get easy financing to grow and expand their business. That is why the Indian Government has recently prepared a framework for the banking industry to provide easy business loans to MSMEs in India. It has also launched several government-based MSME loan schemes to help small businesses secure easy funding.

This has led to the emergence of MSME loans for small businesses in India. Most small business owners in India turn to these loans to infuse a new life into struggling companies. As per the Reserve Bank of India (RBI) data, the share of MSME loans in the overall commercial loans disbursed in India witnessed a jump of more than 50% during the last five years.

What are MSME loans?

MSME loans are a special type of unsecured loans that are provided to start-ups, small business owners, women entrepreneurs, and medium-sized businesses. These may include a Kirana store, departmental store, salon, restaurant, clothing store, stationery shop, small manufacturing companies, and hardware stores, among many others.

The sole objective of MSME loans is to ensure that the lack of financing never stops these businesses from growing and expanding. MSME loans are multi-purpose loans, meaning their end-usage is usually not defined. The borrowers can use these loans for various business-related purposes, from procuring inventory for their business to buying or renting commercial spaces to renovating their business premises to paying wages to their staff.

By helping the MSMEs grow and expand, MSME loans also aid the equitable economic development in India. MSME loans are usually sanctioned for short tenures and have high repayment flexibility to help the borrowers. The eligibility criteria for these loans are a bit different from traditional business loans since they are explicitly meant for MSMEs. The table below depicts the criteria that define the MSMEs in India:

Kind of Enterprise Minimum annual turnover (As per the MSME Act of 2016) As per the revised Classification Bill of 2020
  Manufacturing Services All Enterprises
Micro ₹ 25 lakh ₹ 10 lakh ₹ 5 crore
Small ₹ 25 lakh to ₹ 5 crore ₹ 10 lakh to ₹ 2 crore ₹ 5 crore to ₹ 75 crore
Medium ₹ 5 crore to ₹ 10 crore ₹ 2 crore to ₹ 5 crore ₹ 75 crore to ₹ 250 crore


How small businesses can get MSME loans?

Every small business owner needs access to finances at various stages of growing their business. MSME loans are there to solve their financial problems but the question is how are they going to get these loans?

Below are the ways through which small business owners can get access to MSME loans in India:

Banks

Banks are the first option that comes to our mind whenever we think of applying for any type of loan. They 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 anMSME loan. Banks are the most reliable and convenient source of getting money for small business owners.

However, availing of anMSME loan from a traditional bank has some disadvantages too. Firstly, they have very strict eligibility criteria for providing these loans. Their documentation and verification processes for approving MSME loan applications are also quite lengthy.Secondly, interest rates charged by the banks on MSME loans are usually on the higher side. They are also less flexible in terms of loan tenure and repayment terms.

Non-banking financial corporations (NBFCs)

NBFCs or Non-banking financial corporations are entities or institutions that offer similar services to that of a bank but do not hold a banking license. As per Statista, there were more than 9,500 registered NBFCs in India on 31st January 2021. 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. The most notable one is that NBFCs usually have flexible eligibility criteria for approving MSME loan applications as compared to banks. They usually follow a relaxed approach to ensure easy financing for small business owners. One can easily qualify to avail of anMSME loan with an NBFC even with a slightly lower credit score and negligible business experience.

Also, theinterest rates levied by NBFCs are lower than that of banks. It’s because NBFC’s interest rates are stipulated as per the Prime Lending Rate (PLR), which is not regulated by the Reserve Bank of India (RBI). Hence, they enjoy greater flexibility and vary their MSME business loan interest rates to attract a larger customer base.

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, oneneeds 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 and not to make any revenue out of it. The Government usually provides MSME loans under these schemes at subsidised interest rates. Some of the top Government-backed businessloan 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

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 reportby the Association of Certified Chartered Accountants in India (ACCAI), 80% of the MSMEs in India lack access to formal business credit. The decline in the economic activities during the COVID-19 lockdowns has escalated this problem even further.

Therefore, an MSME loan becomes vital for small business owners. It can help them sustain through the difficult business cycles and maintain their productivity and efficiency. Besides, it also provides them with financial assistance to continue their day-to-day business activities without any hassles. There are several other reasons why MSME loansare crucial for small business owners in India. Let’s have a look at them:

1. They are 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 get access to 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.

Another thing is that MSME loans are usually an unsecured form of financing which means that lenders usually don’t ask for any collateral or security for providing these loans.

2. They are disbursed quickly

MSME loans are usually disbursed very quickly by lenders. Generally, lenders don’t take more than a week for disbursing 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.

3. They help in tackling seasonal cashflow requirements

Running a small business in the Indian economic scenario isn’t easy. Many MSMEs struggle due to seasonal constraints in the demand for their products and services. There can be times when they have surplus cash in hand, and at other times, they may find it hard to continue their day-to-day business operations. 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. Several NBFCs offer a pre-defined loan limit to MSMEs. They can borrow from this loan limit as per their cashflow requirements and the interest would be charged only the amount used by them and not on the entire loan limit.

4. These loans are bestsuited 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 tacklingworking 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 limit, and flexible repayment options make these loans best-suited for the short-term requirements of small businesses.

5. 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.

6. 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.

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 to meet their exact needs during various stages of their growth.

Poonawalla Fincorp provides small business loans to help the MSMEs in India grow and flourish. You can look at our loan offerings and select a product that’s best suited to your requirements.

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