What is MSME Loan? Why is it Useful for Small Business Owners?

Before understanding what is MSME Loan, let us first understand what is MSME and MSME loan meaning.

Micro, Small, and Medium Enterprises (MSMEs) are among India's most significant employment providers. The total contribution of MSMEs to overall employment in the country is 69%. MSMEs account for about 45% of the manufacturing industry and 40% of total exports from the country. Since the contribution is significant, the growth of MSMEs drives the development of the Indian economy.

Like any other businesses, MSMEs also need money and investment to survive and grow. The government of India launched MSME Funding schemes, with banks and Non-Banking Financial Institutions providing Business Loans for MSME to ease MSME financing in India.

What is MSME Loan? Meaning & Definition

An MSME Loan means unsecured Business Loans or Working Capital Loans that MSMEs obtain from a bank or NBFC after qualifying for specific financial tests. However, the eligibility criteria for MSME financing in India are less than what is required to be eligible for a standard Business Loan from any lender. For a regular Business Loan, only those low-risk and profitable businesses are preferred. In contrast, an MSME Loan procedure is simple and it comes with minimum eligibility criteria.

Company	Investment	Turnover
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

 

MSME Financing in India is a very feasible option. Here's why:

• Minimum eligibility criteria required to qualify for the loan
• Profit on certain taxes
• Government based MSME Loans are available
• Provides equal opportunity to almost all types of businesses
• Provides funds for capital growth
• The funds received from the MSME Loan can be used for any business requirement.

What is MSME Loan Procedure?

1.    Check If you meet MSMEs classification criteria

A proper business plan:

The most important thing you need to have a proper business plan is to qualify for MSME funding. 

A registered business:

Business registration is necessary to qualify for any government scheme or other Business Loan to obtain MSME financing in India. 

Profit and Loss statement:

You will be asked for a P&L statement of your business.

Last year's ITR filing for your business:

Applying for an MSME Loan means ensuring that your tax filings are in order.  The ITR documents show your taxes and are scrutinized by the lenders to know whether you have paid all your taxes or not.
 
A good credit history:

MSME Loan procedure requires that you furnish a history of all your past borrowings. So, if you have a good repayment history, you can easily qualify for this loan.
 
Certificates from all authorized bodies:

GST and other registration for business provide compliance checks to your business.
 
Your permanent address proof:

It is mandatory to submit while availing of MSME Funding.

Collateral documents (if applicable):

If you are giving collateral against your loan, you need to submit documents. Ideally, an MSME Loan means it's unsecured, i.e., collateral-free. 
 
Bank details:

Lenders ask for bank details to know your income and expenses. There should be a realistic projection of the business.

Also Read :- How To Apply for MSME Loan Online? - A Detailed Guide

2.    Check purpose of obtaining a loan meets the objectives of MSME financing in India

• To acquire a piece of land or a factory or a plant or build on that land.
• To procure the machinery, laboratory, testing resources, furniture, and other critical fittings which are required for the smooth functioning of the plant.
• To meet the working capital requirements such as inventories, raw materials, and stocks in progress.
• When waiting to receive payment from a party but need to pay for the continued supply of goods/services to creditors.
• For business marketing and advertising.
• Expanding business or launching a new suite of products.
• In addition to the above, funds are required for any other type of business assistance not mentioned above but necessary for the functioning of the business.

3. Check the eligibility criteria

The next step in the MSME Loan procedure is to check the eligibility criteria, which are as follows- 

To qualify for an MSME Loan, one must have a well-structured business plan and should be able to enlist the challenges, strategies, and market options before applying for MSME funding.

• Business Registration: Whether a business is well established or a new start-up, it needs to be registered to avail of any benefits or subsidies from the schemes provided by the Government of India.
• Profit and Loss Statement:  P&L is required to ascertain how well the business is doing.
• 1 Year ITR: Income Tax Return of last year to check if you have paid all your taxes on time.
• Credit History: Lenders would want to check the loan repayment history of borrowers for an earlier loan. A good credit history ensures high eligibility potential.
• The addition of a co-borrower will enhance the eligibility of the application.
• If security or collateral has been provided for availing of the loan, all necessary documents shall be submitted to the bank at the time of application.
• Bank statement for the last 6-12 months to track and validate the borrower's account transactions.
• The business needs to display a realistic projection.

4. Documents required for MSME Loan

The next step in the MSME Loan procedure is to collect the documents needed to obtain the loan. MSME funding means primarily collateral-free loans in most cases. However, lenders may require collateral depending on the situation and the loan's specific requirements. The following documents are necessary for a collateral-free loan.

• KYC Documents required: Like Aadhaar Card or PAN Card, Valid Indian Passport or Voter ID Card/Driving License, etc.
• Address Proof: Utility Bill, Aadhaar Card or Voter ID Card, Valid Indian Passport, Domicile Certificate.
• Financial Documents: Bank Account Statement, Income Tax Return, GST Return, and Profit & Loss Statement for the last six months.
• Required Business Ownership: Required Registration documents of the business, property, and agreement papers, if applicable.

Also, the business owner's age should not be more than 62 years at the time of loan maturity, and should have been running the business for the last three years. However, some of these criteria may not be the same for all lenders, and some may even be willing to negotiate a bit depending on many factors and the final loan terms and conditions.
Now you must have understood what is MSME loan. Let’s understand the features & benefits of MSME Loan.

Features & benefits of MSME Loan

Following are the key features & benefits of MSME Loans:

• Collateral-free loans: Loans up to Rs.30 Lakh are generally available for businesses without collateral.
• Quick Processing: Processing a loan application can be completed within 24 hours, and the amount will be disbursed almost instantly.
• Flexibility: MSME Loan means convenient EMI options as one must pay interest only on the amount, they have withdrawn from loan sanction, and borrowers can withdraw as much as they want as per their working capital needs or other business expenses. They can pay only the interest amount for a fixed period and then start paying the principal as per their profitability.
• Documentation: Documentation and paperwork required are straightforward.
• Pre-approved loan offers: Businesses also have the option of availing of pre-approved loan offers based on the business profitability, vintage, and the area of the business.

Apart from the above facilities, borrowers can also track and change their loans through the online account management option, where everything can be done almost instantly and online. MSME Loans have a much longer tenure option, even in situations where the business is in the growth stage.

Conclusion

The benefits of the MSME Loans make them an ideal choice for start-up business owners. You can anytime avail of these loans and use them to meet your various business requirements, such as expanding your office space, buying inventory and raw materials, upgrading your business equipment or infrastructure, etc.

FAQs About MSME Loans

• Who is eligible for an MSME loan?

Today, MSME Loan is offered by various lenders including banks and NBFCs. With a wide range of lender choices, MSMEs have to select the most suitable lender with a lower interest rate. Here are a few of the eligibility criteria that an MSME must fulfil that includes:
•    Age: Should be between 22 and 65 years of age 
•    Business Vintage: At least 2 years of business vintage 
•    Annual Turnover: Minimum turnover of Rs.9 Lakhs

• Is an MSME loan good?

There are many questions about MSME loan and whether MSME loan is good that are popularly searched on the internet. MSME Loan is good for businesses that are in urgent need of financial requirements. MSME Loan offers additional help especially while you are dealing with financial requirements such as paying wages and salaries to the staff, paying for emergencies, buying new machinery, upgrading current office spaces, dealing with marketing expenses, etc. 

• What is the MSME loan interest rate?

MSME Loan interest rate is the interest rate levied on the MSME Loan provided by the lender. Interest is one of the important components when a borrower is taking a loan from a lender. Other components such as tenure, and principal amount directly influences the EMIs. The interest rate is pre-decided between the lender and borrower before signing the complete documents. Hence, it is important that as a borrower, you agree on a lender who has the most suitable interest rate.

• What does an MSME loan mean?

MSME Business Loan means a loan taken by the borrower to fulfil the financial requirements. Generally, MSME Loan is used to tackle any financial requirements faced by the business. MSMEs operate on small capital as compared to big enterprises. Hence, there is a constant urgent requirement for working capital to manage day-to-day activities. 

Before understanding what is MSME Loan, let us first understand what is MSME and MSME loan meaning.

Micro, Small, and Medium Enterprises (MSMEs) are among India's most significant employment providers. The total contribution of MSMEs to overall employment in the country is 69%. MSMEs account for about 45% of the manufacturing industry and 40% of total exports from the country. Since the contribution is significant, the growth of MSMEs drives the development of the Indian economy.

Like any other businesses, MSMEs also need money and investment to survive and grow. The government of India launched MSME Funding schemes, with banks and Non-Banking Financial Institutions providing MSME Loans to ease MSME financing in India.

What is MSME Loan? Meaning & Definition

An MSME Loan means unsecured Business Loans or Working Capital Loans that MSMEs obtain from a bank or NBFC after qualifying for specific financial tests. However, the eligibility criteria for MSME financing in India are less than what is required to be eligible for a standard Business Loan from any lender. For a regular Business Loan, only those low-risk and profitable businesses are preferred. In contrast, an MSME Loan procedure is simple and it comes with minimum eligibility criteria.

Company	Investment	Turnover
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

 

MSME Financing in India is a very feasible option. Here's why:

• Minimum eligibility criteria required to qualify for the loan
• Profit on certain taxes
• Government based MSME Loans are available
• Provides equal opportunity to almost all types of businesses
• Provides funds for capital growth
• The funds received from the MSME Loan can be used for any business requirement.

What is MSME Loan Procedure?

1.    Check If you meet MSMEs classification criteria

A proper business plan:

The most important thing you need to have a proper business plan is to qualify for MSME funding. 

A registered business:

Business registration is necessary to qualify for any government scheme or other Business Loan to obtain MSME financing in India. 

Profit and Loss statement:

You will be asked for a P&L statement of your business.

Last year's ITR filing for your business:

Applying for an MSME Loan means ensuring that your tax filings are in order.  The ITR documents show your taxes and are scrutinized by the lenders to know whether you have paid all your taxes or not.
 
A good credit history:

MSME Loan procedure requires that you furnish a history of all your past borrowings. So, if you have a good repayment history, you can easily qualify for this loan.
 
Certificates from all authorized bodies:

GST and other registration for business provide compliance checks to your business.
 
Your permanent address proof:

It is mandatory to submit while availing of MSME Funding.

Collateral documents (if applicable):

If you are giving collateral against your loan, you need to submit documents. Ideally, an MSME Loan means it's unsecured, i.e., collateral-free. 
 
Bank details:

Lenders ask for bank details to know your income and expenses. There should be a realistic projection of the business.

Also Read :- How To Apply for MSME Loan Online? - A Detailed Guide

2.    Check purpose of obtaining a loan meets the objectives of MSME financing in India

• To acquire a piece of land or a factory or a plant or build on that land.
• To procure the machinery, laboratory, testing resources, furniture, and other critical fittings which are required for the smooth functioning of the plant.
• To meet the working capital requirements such as inventories, raw materials, and stocks in progress.
• When waiting to receive payment from a party but need to pay for the continued supply of goods/services to creditors.
• For business marketing and advertising.
• Expanding business or launching a new suite of products.
• In addition to the above, funds are required for any other type of business assistance not mentioned above but necessary for the functioning of the business.

3. Check the eligibility criteria

The next step in the MSME Loan procedure is to check the eligibility criteria, which are as follows- 

To qualify for an MSME Loan, one must have a well-structured business plan and should be able to enlist the challenges, strategies, and market options before applying for MSME funding.

• Business Registration: Whether a business is well established or a new start-up, it needs to be registered to avail of any benefits or subsidies from the schemes provided by the Government of India.
• Profit and Loss Statement:  P&L is required to ascertain how well the business is doing.
• 1 Year ITR: Income Tax Return of last year to check if you have paid all your taxes on time.
• Credit History: Lenders would want to check the loan repayment history of borrowers for an earlier loan. A good credit history ensures high eligibility potential.
• The addition of a co-borrower will enhance the eligibility of the application.
• If security or collateral has been provided for availing of the loan, all necessary documents shall be submitted to the bank at the time of application.
• Bank statement for the last 6-12 months to track and validate the borrower's account transactions.
• The business needs to display a realistic projection.

4. Documents required for MSME Loan

The next step in the MSME Loan procedure is to collect the documents needed to obtain the loan. MSME funding means primarily collateral-free loans in most cases. However, lenders may require collateral depending on the situation and the loan's specific requirements. The following documents are necessary for a collateral-free loan.

• KYC Documents required: Like Aadhaar Card or PAN Card, Valid Indian Passport or Voter ID Card/Driving License, etc.
• Address Proof: Utility Bill, Aadhaar Card or Voter ID Card, Valid Indian Passport, Domicile Certificate.
• Financial Documents: Bank Account Statement, Income Tax Return, GST Return, and Profit & Loss Statement for the last six months.
• Required Business Ownership: Required Registration documents of the business, property, and agreement papers, if applicable.

Also, the business owner's age should not be more than 62 years at the time of loan maturity, and should have been running the business for the last three years. However, some of these criteria may not be the same for all lenders, and some may even be willing to negotiate a bit depending on many factors and the final loan terms and conditions.
Now you must have understood what is MSME loan. Let’s understand the features & benefits of MSME Loan.

Features & benefits of MSME Loan

Following are the key features & benefits of MSME Loans:

• Collateral-free loans: Loans up to Rs.30 Lakh are generally available for businesses without collateral.
• Quick Processing: Processing a loan application can be completed within 24 hours, and the amount will be disbursed almost instantly.
• Flexibility: MSME Loan means convenient EMI options as one must pay interest only on the amount, they have withdrawn from loan sanction, and borrowers can withdraw as much as they want as per their working capital needs or other business expenses. They can pay only the interest amount for a fixed period and then start paying the principal as per their profitability.
• Documentation: Documentation and paperwork required are straightforward.
• Pre-approved loan offers: Businesses also have the option of availing of pre-approved loan offers based on the business profitability, vintage, and the area of the business.

Apart from the above facilities, borrowers can also track and change their loans through the online account management option, where everything can be done almost instantly and online. MSME Loans have a much longer tenure option, even in situations where the business is in the growth stage.

Conclusion

The benefits of the MSME Loans make them an ideal choice for start-up business owners. You can anytime avail of these loans and use them to meet your various business requirements, such as expanding your office space, buying inventory and raw materials, upgrading your business equipment or infrastructure, etc.

FAQs About MSME Loans

• Who is eligible for an MSME loan?

Today, MSME Loan is offered by various lenders including banks and NBFCs. With a wide range of lender choices, MSMEs have to select the most suitable lender with a lower interest rate. Here are a few of the eligibility criteria that an MSME must fulfil that includes:
•    Age: Should be between 22 and 65 years of age 
•    Business Vintage: At least 2 years of business vintage 
•    Annual Turnover: Minimum turnover of Rs.9 Lakhs

• Is an MSME loan good?

There are many questions about MSME loan and whether MSME loan is good that are popularly searched on the internet. MSME Loan is good for businesses that are in urgent need of financial requirements. MSME Loan offers additional help especially while you are dealing with financial requirements such as paying wages and salaries to the staff, paying for emergencies, buying new machinery, upgrading current office spaces, dealing with marketing expenses, etc. 

• What is the MSME loan interest rate?

MSME Loan interest rate is the interest rate levied on the MSME Loan provided by the lender. Interest is one of the important components when a borrower is taking a loan from a lender. Other components such as tenure, and principal amount directly influences the EMIs. The interest rate is pre-decided between the lender and borrower before signing the complete documents. Hence, it is important that as a borrower, you agree on a lender who has the most suitable interest rate.

• What does an MSME loan mean?

MSME Business Loan means a loan taken by the borrower to fulfil the financial requirements. Generally, MSME Loan is used to tackle any financial requirements faced by the business. MSMEs operate on small capital as compared to big enterprises. Hence, there is a constant urgent requirement for working capital to manage day-to-day activities. 

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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