An MSME Business Loan is a secured loan given to small businesses. It can be used to meet their business-related expenses. Given for short periods, these loans come with flexible repayment options.
When compared to conventional commercial loans, an MSME business loan is easily accessible. The eligibility criteria here are more flexible.
It can help you reclaim cash in times of need and keep up your cash flow. The documentation required is minimal. Also, the disbursement would be quicker than that of a commercial loan.
You can use an MSME Business loan for many purposes such as:
- Funding your working capital requirements
- Purchasing machinery
- Investing in fixed assets
- Buying raw materials
It can help you meet your credit requirements too.
Types of MSME Business Loans
The standard types of MSME Business loans offered by financial institutions include:
Working Capital Loan
A Working Capital Loan can be ideal for MSMEs, to fund their daily business operations. Your options include:
Overdraft Facility on Current Account
This can help you overdraw money from your current account until a certain limit, sanctioned earlier.
Cash Credit Loan
This will help you withdraw cash up to a certain pre-approved limit to meet any of your critical, seasonal, or impromptu working capital financing requirements.
If you are in urgent requirement of liquidity you can choose to discount your bills receivable from your bank. You get an upfront payment from the bank, at a certain discount or commission. Your bank will present your bill to your client at the end of its tenure.
Short-Term Unsecured Business Loan
This is a business loan with a tenure of about one to three years. You can use it to expand your business.
Loans Offered under the CGTMSE or Credit Guarantee Fund Trust for Micro and Small Enterprise scheme
The Ministry of Micro, Small, and Medium Enterprises has introduced this scheme, to provide unsecured loans up to INR 1 Crore, to new or existing MSMEs. These loans are guaranteed by CGTMSE.
Bank Guarantee Loan
This is a third-party loan guaranteed by your bank. The lending party will receive a certain pre-specified amount of money if the borrowing MSME defaults.
Letter of Credit
This is a letter given by your bank to your supplier, pledging that complete payment will be made after the supplies have been delivered.
As an MSME, you can apply for a fund-based term loan, if you require cash to expand your capacity, purchase fixed assets, or increase your capital. These include:
Secured Term Loan
These are loans that are offered by banks against a property that could be industrial, commercial, or residential.
Loans to purchase construction equipment or commercial vehicles
Here the equipment or vehicle that you purchase becomes the collateral against which you can borrow the loan.
Eligibility Criteria for an MSME Business Loan
MSME registration is a must for any small business, to apply for an MSME Business Loan. You can get your business registered as an MSME by providing certain basic documents such as:
- Address proof of your business
- Licenses you might have from the regulatory agencies
- Copies of your sales and purchase bills
An MSME registration can help you get a bank loan without any collateral. You also get to enjoy:
- Income tax exemption
- Protection from late payment fees
- Industrial promotional subsidy
- Concessions on your electric costs
- Reimbursements for your ISO certifications
Advantages of MSME Business Loan
The best part about an MSME business loan is that it can be approved and granted quickly. There are online portals where you can fill in your application and submit the required documents. Upon approval, you will receive the amount in your bank account. You should also be able to manage your business loan from the official web banking site of the lending institution.
How to Apply for an MSME Business Loan
There are two ways to apply for an MSME Business Loan:
- You can visit your nearest branch office and apply.
- You can fill in the online application.
The information that you will need to provide includes:
- Date of birth (as displayed on your PAN card).
- Telephone number.
- Details about your business.
- Annual income.
- Information about your business earnings and turnover.
The financial institution may also ask for a copy of your business’s PAN card. Based on these, it will decide whether to approve the MSME business loan.
In addition, banks may enquire about the operations of your business before approving the loan. Be prepared to provide details about any other loans you might have taken or might be eligible for.
After providing all the information, you would be able to determine the maximum MSME business loan you can avail of. You will also get information about the monthly EMI that you would have to pay, along with the interest rate and other details.
Make sure to check the packages and offers the lending institution provides. Go through the repayment terms carefully. Review your loan amount and select your preferred repayment period. Ensure that there are no errors in the details that you have furnished to the lending institution. You should receive the loan amount in your account, within a few days.
There are many resources available for MSMEs in India. The government has come up with an MSME loan program, which could be a fantastic opportunity for emerging companies like yours. Visit the Piramal Finance website if you need more information about the MSME business loan or any other business loan, you may be interested in.