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MSME Business Loan – Features, Eligibility, Documentation, Interest Rates

What is an MSME Loan?

If you are an owner of an MSME, you can obtain an MSME business loan to expand your business, purchase assets, machinery, or raw materials for your business, or run operations more efficiently. You can use the loan for other purposes such as fulfilling the working capital requirement, paying rent or salaries of employees, cash flow management, managing monthly expenses, investing in fixed or movable assets, or any other financial requirement of the company.

Many financial institutions offer special rates for MSME business loans. Usually, these business loans have low interest rates and flexible tenure. This is to help small business owners cover their financial requirements without having to feel burdened by the loan. However, each bank has a different interest rate and duration. 

Start-up owners, small business owners, household business owners, and women business owners can apply for and get approved for MSME loans. As these loans are unsecured, the business owners have to fulfil some basic eligibility requirements to apply for the loan. This ensures that the financial organisation or lender is at lesser risk in case of non-payment or default.

MSME Categorization

The following companies fall under the MSME category:

CompanyMicroSmallMedium
Maximum InvestmentLess than INR 1 croreLess than INR 10 croreLess than INR 20 crore
Turnover thresholdLess than INR 5 croreLess than INR 50 croreLess than INR 100 crore

Factsheet MSME Registration

According to the Udyam Registration website, the total MSME Registrations for 2021-22 are:

Total MSME Registrations – 92,50,486
MicroSmall Medium
88,37,5503,75,86237,074

These figures were updated on the 24th of June 2022.

Estimated Number of MSMEs in India in 2021-22

According to the National Sample Survey (NSS), the estimated number of MSMEs in India in 2021-22 is:

Activity CategoryEstimated Number of MSMEs (in Lakhs)Share %
RuralUrbanTotal
Manufacturing114.1482.50196.6531
Electricity0.030.010.030
Trade108.71121.64230.3536
Other Services102.00104.85206.8533
All 324.88309.00633.88100

Distribution of MSMEs in Rural and Urban Areas

Here is the distribution of MSMEs in rural and urban areas according to the Ministry of MSME website:

SectorMicroSmall MediumTotalShare
Rural324.090.780.01324.8851
Urban306.432.530.04309.0049
All630.523.310.05633.88100

Who Qualifies for MSME Loans?

The businesses that are eligible for MSME loans are sole proprietorships, partnerships, manufacturing units, and service-based small businesses. If your business is of the retail trader category, training and/or teaching institutes, agricultural start-up, or self-help groups, you cannot avail of an MSME loan.

In 2020, the Government of India expanded the meaning of MSME to include both manufacturing and service businesses. The eligibility has also been changed from investment only to investment and annual turnover.

You can avail of an MSME loan according to your business category. When the MSME business loan is approved, the money will be deposited in your business bank account. 

MSME Loan Scheme

Most banks and financial institutions offer MSME business loans at interest rates as low as 7.65% per annum. The business loan amount can be as low as INR 50,000, and the tenure can be up to 15 years. However, you need to talk to your bank before you take out a business loan to understand their terms and conditions. Each bank, financial institution, and lender has a different set of interest rates, tenures, minimum loan amount values, and eligibility criteria.

Features of MSME Loans

MSME schemes offer plenty of benefits to MSME business owners. These MSME schemes allow business owners to expand their business in whichever way they wish.

Here are some of the features MSME schemes and MSME loans offer:

  1. Interest rates

Depending on the business owner’s eligibility, every financial institution and bank has different interest rates. These interest rates start as low as 7.65% pa. This is incredibly useful for micro, small, and medium business owners.

  1. Loan Amount

The business loan has no minimum amount limit across most banks and financial institutions. MSME owners can get loans for as less as INR 50,000. The maximum limit is usually set at INR 1 crore. This amount can exceed in case of special requirements.

  1. Tenure

The business loan has a tenure starting from 12 months to 15 years. It may increase if the business requires it.

  1. Collateral

Collateral or security is something that is pledged in return for a loan. If the loan is not paid off, the collateral is to be forfeited. For business loans, however, there is no need for collateral as MSME loans are unsecured.

  1. Processing Fee

Processing fees for sanctioning MSME loans are very low. They can be anywhere between 0% to 4% of the sanctioned business loan amount.

  1. Foreclosure charges

Foreclosure charges or penalty payment is also very low for MSME loans. You have to pay between 0% to 5% of the outstanding principal amount of the business loan.

  1. Part-payment charges

Part-payment or prepayment is when you have some amount in hand which is lesser than the outstanding amount. In the case of part payment, you will be charged between 0% to 4% of the outstanding amount of the business loan.

  1. Subsidy

There are certain criteria for subsidies. However, only select financial institutions and banks offer this facility.

  1. Credit Facilities

Various other credit facilities, such as working capital loans, overdrafts, bill discounting, term loans, letter of credit, etc., are offered under MSME loans.

You will get all these features when you get an MSME loan scheme in 2022 and apply online. With an MSME loan scheme 2022, you can apply online to get the set of all features your financial institution gives you.

MSME loans can be both secured and unsecured. The choice of type of business loan is made by the business owner applicant according to their financial capacity and the terms offered by the bank or financial institution.

Eligibility Criteria for MSME Loans

To avail of MSME loans, a micro, small, or medium business owner must fulfil the following criteria:

  1. Their credit score must be 750 or above.
  2. The business vintage must be atleast one year. Business vintage means the age of the business or the time since the business has been operational.
  3. The business turnover must be at least INR 12 lakhs. This value differs for different financial institutions.
  4. The business owner must be financially stable and must have a good history of repayment.
  5. The business owner should not have previous defaults with other financial institutions.

Who Can Apply for MSME Loans?

The following entities can apply for MSME loans:

  • Individuals
  • MSME business owners
  • Women entrepreneurs
  • Self-employed individuals
  • People under the SC/ST/OBC category
  • Private or Public Limited Companies
  • Sole Proprietorships
  • Partnerships
  • Limited Liability Partnerships (LLPs) in the trading, service, and manufacturing industries

Documents Required for Obtaining MSME Loans

  1. Application form with all details
  2. Passport-size photograph of the applicant
  3. KYC documents of applicant and co-applicants including Aadhar Card, Passport, Driving License, PAN Card, Voter’s ID, and telephone or electricity bills
  4. Business address
  5. Business vintage proof such as ITR, Trade License, Registration, Sales Tax Certificate, etc.
  6. Bank statements from the previous six months along with bank details
  7. Business Establishment Certificate or Incorporation Letter
  8. Proof of SC/ST category or OBC category, if applicable
  9. Other documents required by the bank or financial institution 

MSME Business Loan Schemes Provided by the Government of India

MSME business loan scheme was initiated by the Government of India’s Ministry of MSME to give a boost to the micro, small, and medium enterprises (MSMEs) in India. Several banks and financial institutions are a part of this business loan scheme and offer business loans at competitive rates. The various popular MSME business loans offered by banks and financial institutions are:

  • CGTMSE – Credit Guarantee Fund Trust for Micro and Small Enterprises
  • CLCSS – Credit Linked Capital Subsidy Scheme
  • Credit Guarantee Scheme
  • MUDRA Yojana offered by PMMY
  • NSIC – National Small Industries Corporation Subsidy
  • PMEGP – Prime Minister (Pradhan Mantri) Employment Generation Programme
  • PMRY – Pradhan Mantri Rozgar Yojana
  • 59 Minute PSB Loan
  • Standup India
  • Startup India

Obtaining MSME Business Loans Without Collateral

MSME business loans may be secured or unsecured business loans. However, most banks and financial institutions offer unsecured loans that do not require collateral. The business owner does not need to submit any collateral or security to the bank.

You can avail a collateral-free MSME business loan for amounts of up to INR 1 crore. These business loans are usually issued on a short-term basis and have a tenure starting from 12 months to 5 years. You can get an unsecured, collateral-free business loan based on your credit score, repayment capacity, and financial standing.

MSME Business Loan Interest Rates

Though MSME business loans offer competitive interest rates, you can avail of lower interest rates on your business loan. Many public and private banks, Non-Banking Financial Companies (NBFCs), Small Finance Banks (SFBs), Regional Rural Banks (RRBs), etc., offer MSME business loans. However, the interest rates of each of these lenders are different. The loan amount, tenure, the annual turnover of the business, the applicant’s profile and credit score, the company’s income, financial stability, repayment history, and creditworthiness all decide the final interest rate on an MSME business loan.

Conclusion

MSME business loans are versatile business loans that can be used to fill the financial gap in micro, small, and medium enterprises. As they come with low interest rates and flexible tenures, they are accessible to MSME business owners.

Frequently Asked Questions

Can a woman entrepreneur apply for an MSME business loan?

Yes, MSME business loans apply to micro, small, and medium enterprise owners as well as women entrepreneurs and people belonging to the SC/ST and OBC categories.

Can my credit score affect my chances of getting an MSME business loan?

Every business owner applying for an MSME business loan should have a credit score of above 750. A good credit score reflects the person’s repayment capability and financial stability.

How do I know if my business falls under the MSME scheme?

There are different categories to decide if your business is MSME:
Micro – If your investment is less than INR 1 crore and your annual turnover is less than INR 5 crore
Small – If your investment is less than INR 10 crore and your annual turnover is less than INR 50 crore
Medium – If your investment is less than INR 20 crore and your annual turnover is less than INR 100 crore

Are all MSME business loans collateral-free?

MSME business loans can be secured or unsecured. However, most banks and NBFCs offer unsecured business loans, which means they are collateral-free.

What can I do with an MSME business loan?

You can use the loan to purchase assets, invest in movable or immovable assets, purchase machinery, hire staff, pay employees, pay rent, or fulfil any other financial needs you may have in your business.

Can I get a separate business loan to buy machinery?

Yes, you can apply for a machinery loan. A machinery loan is an MSME business loan that is specifically sanctioned for buying equipment. This loan falls under the equipment finance category and is sanctioned by various banks and NBFCs.

Is there a fee for MSME registration?

MSME registration is completely free. You can also get an MSME certificate for free. It is not mandatory to register under MSME but you can apply for MSME business loans if you do.

Who can apply for an MSME business loan?

MSME business loans are applicable for self-employed individuals, women entrepreneurs, people belonging to the SC/ST and OBC categories, Private or Public Limited Companies, MSME owners, sole proprietorships, partnerships, and LLPs.

What do I need as business vintage proof?

You will require the previous year’s ITR, Trade License, Registration, and Sales Tax Certificate.

How long is my MSME Certificate valid?

MSME Certificate is valid for 5 years.

Is GST return necessary for getting MSME loans?

Yes, you must submit the previous year’s GST returns to avail of MSME loans. This is applicable to all existing MSME owners as well as new salaried professionals looking to start a new MSME.

Is there any way to repay my MSME business loan faster?

Yes, you can repay your MSME business loan faster by choosing to pay bi-weekly instalments.

For what period is the Provincial Registration Certificate (PRC) valid?

The validity of the PRC is for 5 years.