What is MSME Loan, Eligibility & How to Apply for it?

In the context of business, “MSME” refers to Micro, Small & Medium Enterprises that mostly include small businesses and industries that are key drivers of employment and women empowerment at the grassroots level. 

They are the second most common occupation after agriculture, accounting for 40% of India’s exports. The nation’s economy greatly benefits from MSMEs, with such businesses contributing nearly 30% to India’s GDP. 

However, insufficient funds and uninterrupted working capital is something that most small and medium-sized enterprises have to deal with. One of the biggest reasons behind this is the low creditworthiness of MSMEs. 

But, today, many banks and NBFCs are coming forward to offer collateral-free loans to MSMEs in order to promote entrepreneurship and boost India’s economy. Let’s discuss MSME loan eligibility and its application procedure. 

What Does an MSME Loan Mean?

MSME loans are business loans for entrepreneurs who desire to start a small or medium-sized business. Although most MSME loans are collateral-free, borrowers must repay the interest on the loan. 

Availing MSME loan is the easiest way to get financing for startups and medium-sized enterprises looking to expand. A robust business plan is usually enough to get a Rs. 5 lakh to Rs. 5 crore loan. Some of the types of MSME loans in India include Pradhan Mantri Mudra Yojana Stand Up India, term loans, working capital loans, line of credit and equipment loans.

Eligibility Criteria of MSME Loans

Although lending institutions may have different eligibility requirements, they all generally follow a set of fundamental guidelines for SME loans. To lessen the likelihood of being rejected, please review the requirements set forth by the specific lender before applying.

  • Purpose: The goal of the loan application should be to fulfil the needs of the business. Examples of these needs include buying equipment or supplies, obtaining working capital, advertising goods and services, growing the workforce or range of products, branching out into a new area, and many more.
  • Age: The age range for the borrower usually ranges between 25 years and 60 years.
  • Experience: 2-3 years of business vintage is required to apply for the loan. It should belong to either the service sector or the manufacturing sector. 
  • Documents: The applicant must submit business IT returns from the previous year at the very least. Some of the other documents required are financial statements, including your balance sheet, profit and loss statement, and cash flow statement. 

It must be noted that MSME loans are usually offered to enterprises that have an annual turnover ranging between Rs. 25 lakhs to Rs. 50 crores. The loan amount depends on the lender’s discretion. 

Documents Required for MSME Loan

The following are some of the essential documents required while applying for the MSME loan: 

  • Annual accounting report including essential information about profitability and liquidity
  • Letters of personal assurance from promoters, partners, and directors
  • Documents for business registration
  • Certificate of MSME registration for the business
  • A copy of the filing documentation for sales tax returns
  • A replica of the filing forms for income tax returns
  • Any licences particular to a certain industry, such as a medicine licence for a pharmaceutical company

How to Apply for an MSME Loan?

You must obtain the MSME loan application form from the lender you have selected to submit your loan application to. 

  1. Complete the shape with the relevant details, for example the specific business, date of incorporation, GSTIN, company’s registration address, Permanent Account Quantity of the organization, etc.
  2. Make certain to supply all of the needed documents to aid the data provided within the form.
  3. If it is a secured loan, you must submit details and documents for the collateral offered. 

After submitting the application form either online or offline, wait for approval. Please note that upon approval, you will be able to use the funds for business purposes only.   

Fees and Interest Rates Applicable

  • Processing Fees: MSME loans offered by lenders may have varying processing fees. Select a lender who charges a nominal processing fee for the loan. Also, make sure to check the prepayment charges, if any. 
  • Interest Rates: With respect to the lender and also the loan plan you select, the eye rate may change. The supply of collateral, the borrowed funds amount, the borrowed funds term, the applicant’s creditworthiness, and then any previous loans they’ve already are possible points which are considered through the loan provider before deciding the interest rate. It typically ranges between 8.40% and 24% annually.

Benefits of Availing MSME Business Loan

MSME businesses who apply for loans under the initiative receive the following benefits:

  • The majority of loans are collateral-free. Policies may fluctuate slightly due to financial institution or establishment details.
  • Most MSME business loans are approved online and deposited swiftly. Your financial provider’s online banking lets you handle the loan effortlessly.
  • Establishments receive patent registration subsidies under MSME initiatives. This patent registration subsidy contributes to a business’s growth, with the Indian government encouraging small enterprises to develop and work on new initiatives.
  • Most MSME schemes exempt overdraft interest rates to protect businesses in bad markets. Rates and tenure vary based on bank and scheme.

Final Thoughts

It’s excellent that you have decided to apply for a business loan online. In addition to availing an MSME loan from NBFCs or banks, you can also apply for government funding schemes as well. Some of the popular options include the MUDRA loan, Credit Guarantee Scheme, etc. Make sure to opt for a loan that aligns with your requirements and gives your business the much-needed push to reach the next level!