MSME Loans – Check Features, Eligibility and Interest Rates 2022

Do you own a micro, small or medium enterprise (MSME)? Do you want funds for buying raw materials, working capital, or other business purposes? Many banks and non-banking financial companies (NBFCs) offer MSME loans with limited or no collateral requirements and at reasonable interest rates.

This article will help you understand MSME loans and their features, eligibility, interest rates, and the documents required to apply.

Role of MSMEs in the Indian Economy

Many economists consider MSMEs to be the backbone of the Indian economy. There are over 63 million MSMEs in the country, and they employ over 110 million Indians. These enterprises support economic growth, job creation and poverty alleviation across the country, including in semi-urban and rural areas. In addition to this, MSMEs also aid in improving access to domestic and export markets for Indian businesses.

What are MSME Loans? 

As we have noted, MSMEs are critical to the Indian economy. However, any business needs funding to carry out its daily activities and for capital expenditures. The money a company uses daily to meet expenses, such as paying suppliers and purchasing new inventory, is called working capital. The money invested in equipment and machinery is the fixed capital investment. MSME loans help businesses by enabling them to continue operating without the concern of not meeting daily cash flow and working capital requirements. 

Consider a small business entrepreneur who requires money to kickstart their business. This situation would have been highly distressing in the past when there was no or limited access to sophisticated financial instruments. Thus, the individual would have had to turn to their savings, family members, friends, or exorbitant interest-charging moneylenders. Today, however, with the government’s increasing support for MSMEs, the entrepreneur can easily avail of an MSME loan by going to a bank or NBFC. These institutions provide hassle free loans at reasonable interest rates, reducing the mental burden and stress for small businesses. Business owners can secure their business credit needs by applying for this loan.  Moreover, they can effectively acquire the funds needed to manage their enterprise’s debts and other financial commitments.

MSME Loan Features

Given below are some of the key features and benefits of MSME loans:

1. The most attractive feature of an MSME loan is that it requires no collateral security or third party to avail it since it is an unsecured loan. Another essential feature is the ease of availability of MSME loans and quick disbursement, which helps prevent delays in business activities. 
2. A business person can borrow a maximum amount of ₹10 crore
3. Different lending financial institutions offer different interest rates for MSME loans.
4. These loans support infrastructural development, the advancement of developmental technologies, and the modernisation of industries across the country, including in Tier 2 and Tier 3 towns and cities.

Eligibility Criteria For Availing of an MSME Loan

Different lenders have different requirements. This section will cover the typical eligibility criteria followed by most lenders. However, it is crucial to remember that the bank or NBFC of your choice may have stringent/lenient eligibility criteria, which might change from time to time.

1. You must be between  25-70 years 
2. Your business must be more than three years old.
3. Your credit score should be 685 or higher 
4. You must not have any records of loan default in your personal or business name.
5. You should have filed the Income Tax Return (ITR) for your business for at least one year.
6. The eligibility varies from bank to bank, but some lenders stipulate that the company’s turnover must be at least ₹12 lakh.

Banks or NBFCs? Which Option Is Better to Avail an MSME Loan?

It is a debatable question, and you must consider some important variables, such as the timeline to avail of the loans, and decide on a case-by-case basis. Typically, banks cannot serve the MSME sector in a way that is desirable for rapid expansion. It is despite offering loans at cheap interest rates compared to NBFCs. This is because MSMEs may not have the adequate credit history that banks require to approve loans. 

Moreover, banks may need the MSMEs to go through a lengthy approval or vetting process for loan sanction, which increases the turnaround time. This may be unfavourable for the MSMEs, which typically need urgent capital to cover their day-to-day expenses. Due to this, many MSMEs prefer to receive financial support from NBFCs, which offer faster processing timelines for granting loans.

Documents Required for MSME Loans

There are a few documents that one must provide to avail of an MSME loan:

1. Identity Proof: Your Aadhar card, PAN card, voter ID card, driving licence, or passport can act as identity proof.
2. Proof of Residence: You can use electricity bills and lease agreements as proof of your residence.
3. Financial Documents: Audited balance sheets, last two years’ ITR, profit and loss statements, and the previous six months’ bank statements are considered eligible financial documents. 
4. Proof of Business Address: Rental agreements and utility bills are proof of business address. 
5. Proof of Securities/Properties Provided: You might be required to give photocopies of the Title Deed. 

To apply for an MSME loan, you must first register your business as an MSME at https://udyogaadhaar.gov.in/. Once registered, you can approach a bank or NBFC for an MSME loan application. 

Conclusion

MSME loans offer numerous benefits to their borrowers. They are generally for a short tenure and issued at relatively low-interest rates without the need to provide any collateral. By availing of an MSME loan, you can improve your business’s cash flow, which may, in turn, facilitate the growth and development of your business.

Frequently Asked Questions (FAQs)