The sustainability of a business in today’s competitive economic environment is immensely dependent on the availability of funds. This applies to all forms of organisations. However, MSMEs face such major problems, as giant corporations have a considerable amount of fixed assets and numerous ways to borrow funds. Some of the popular ways large enterprises finance funds are stocks, bonds, loans, etc. This makes it even more difficult for MSMEs to sustain.
Therefore, MSMEs receive various kinds of financing benefits. However, if you do not understand the significance of MSME loans for small business owners, read the article below. It will also guide you through the documentation and eligibility for MSME loans.
What is an MSME Loan?
An MSME loan is a form of financial assistance given to small enterprises to meet their operational demands. These loans are specially designed to provide financial support to MSMEs. This money is borrowed for things like buying equipment and managing daily expenditures.
MSME loans are often known for their simpler application processes and flexible payback arrangements. This makes them more accessible to smaller enterprises that may have difficulty obtaining traditional finance.
What are the Types of MSME Loans?
MSMEs require financial support in various ways. Therefore, to finance their wide range of business requirements effectively, government and banks offer the following types of loans:
1. Term Loans
Term loans are substantial financial commitments with fixed interest rates and structured repayment plans. They serve long-term business needs, such as purchasing equipment and expanding operations. The predictability of term loans further assists businesses in planning their finances over an extended period.
2. Line of Credit
A line of credit offers businesses a flexible credit facility akin to a business credit card. It allows them to draw funds as needed and repay accordingly. This option provides financial agility without fixed loan amount constraints for managing short-term expenses like inventory or payroll.
3. Overdraft Facility
An overdraft facility permits businesses to access funds beyond their current account balance up to a pre-approved limit. It works as a safety net for unforeseen expenses or temporary cash flow shortages. Such coverage ensures that operations can continue smoothly even during financial fluctuations.
4. Bill Discounting/Invoice Factoring
Bill discounting or invoice factoring involves selling outstanding invoices at a discounted rate to a lender. It particularly offers a solution to improve liquidity and meet immediate financial obligations for businesses with numerous outstanding invoices.
5. Point of Sale (POS) Finance
POS finance allows businesses to offer customers convenient financing options at the checkout counter. It is especially useful for enterprises dealing with high-value products that customers may not prefer to pay upfront. POS enhances sales opportunities and customer satisfaction.
6. Microfinance Loans
Microfinance loans are small-scale financial solutions typically tailored for microenterprises with fewer than 10 employees. These loans are beneficial for businesses in their early stages or those requiring a modest amount of capital to cover startup costs.
What are the Benefits of MSME Loans?
MSME loans offer an array of benefits. Some of them are listed as follows:
1. Financial Support for Growth
MSME loans provide critical financial support for business expansion and development. These loans enable MSMEs to explore expansion prospects by expanding operations and entering new markets.
2. Flexible Repayment Terms
Many MSME loans include flexible repayment terms, which allow firms to customise the repayment plan to their cash flow patterns. This adaptability guarantees that companies can meet their financial responsibilities without unnecessary stress.
3. Customised Loan Products
Financial institutions frequently provide a number of MSME loan products that are tailored to individual business requirements. Businesses may select the loan kind that best fits their needs, whether it’s a machinery loan, a business growth loan, or invoice finance.
4. Competitive Interest Rates
MSME loans frequently have reasonable interest rates, making them more accessible and affordable for small firms. This contributes to lower total borrowing costs and improves the financial viability of MSME ventures.
5. Improved Credit Profile
On-time repayment of MSME loans improves enterprises’ credit profiles. This enhanced credit history can lead to more lending opportunities and better conditions in the future.
6. Economic Growth
MSME loans significantly contribute to job creation and overall economic growth by assisting MSMEs with financial support. Small enterprises are frequently key sources of employment. Thus, their expansion proves to be more healthy for the economy.
7. Technology Adoption
MSME loans can help small enterprises adopt new technologies and innovate. These loans help MSMEs stay competitive in an ever-changing business market, whether it’s modernising machinery or implementing digital solutions.
8. Risk Mitigation
Access to MSME loans helps businesses mitigate financial risks by providing a cushion against unanticipated costs or market volatility. This financial stability is critical for small enterprises’ resilience and long-term success.
Governments in various regions give assistance and incentives to MSMEs, such as favourable loan terms and subsidies. Obtaining MSME loans can qualify firms for such assistance, further improving their financial condition.
What are the Eligibility Criteria to get an MSME Loan?
Securing an MSME loan requires meeting specific criteria set by lenders to assess your business’s ability to repay the loan. While these can vary slightly between institutions, here’s a general overview of the key eligibility aspects:
1. Business Profile
Most lenders focus on micro, small, and medium enterprises operating in legal sectors. These sectors can be manufacturing, trading, and services. Some schemes may target specific industries, such as greenfield projects. Thus, understanding the specific niche a lender caters to is essential for aligning your business with the right financing options.
2. Business Age
Lenders generally prefer established businesses with a minimum operational history. The minimum operation history typically ranges from 2 to 3 years. However, certain schemes exist for startups, offering financial support even with limited operational experience. It is crucial to identify lenders with favourable terms for businesses at different stages of maturity.
3. Turnover & Investment
Loan eligibility often depends on your business’s annual turnover and investment in plant and machinery. Different loan categories have varying limits based on these parameters.
4. Profitability & Cash Flow
Lenders assess your business’s financial health based on audited financial statements or income tax returns. Consistent profitability and healthy cash flow are crucial indicators of your ability to handle loan repayments. Therefore, demonstrating a strong financial standing increases the likelihood of loan approval.
5. Credit Score
Maintaining a healthy credit score, ideally above 650, is essential. A good credit score showcases responsible financial behaviour and instils confidence in lenders regarding your creditworthiness. Thus, regularly improving your credit score can significantly enhance your chances of securing a loan.
Lenders may require collateral to mitigate risk depending on your credit profile and the loan amount. Collateral can be property, equipment, or personal guarantees.
Timely submission of complete business documents is crucial for efficient loan processing. Essential documents for loan approval include PAN cards, Aadhaar cards, and financial statements. Ensuring all required documentation is in order further demonstrates professionalism to potential lenders.
What are the Documents Required to get an MSME Loan?
Applying for an MSME loan involves compiling specific documents to provide the lender with a clear picture of your business and its financial health. These documents act as proof of your identity, business legitimacy, and financial performance. Let’s break down the main categories:
1. Identity and Address Proof
- PAN card
- Aadhaar card
- Voter ID card
- Driving license
B. Business (if applicable)
- Udyam Registration Certificate
- GST Registration Certificate
- Shop Act License
- Partnership Deed (for partnerships)
- MOA and AOA (for companies)
2. Business Address Proof
- Rental agreement, lease agreement, or sale deed
- Utility bills (electricity, telephone) not older than 3 months
3. Financial Documents
- Income tax returns of the past 2-3 years, including Profit & Loss Account and Balance Sheet
- Bank statements of the business account for the past 6 months
- Projected financial statements for the loan period (optional)
4. Loan-Specific Documents
- Quotation for equipment purchase (for equipment loans)
- Property documents (for loans with collateral)
- Business plan and project reports (for some specific loan schemes)
Where to get an MSME Loan From?
Small business owners seeking MSME loans in India have several avenues to explore for financial support. Here are the key options for obtaining an MSME loan:
Banks are a traditional and widely recognised source for MSME loans. Both private and public-sector banks offer financial assistance to small businesses. While banks are considered reliable, their stringent eligibility criteria and lengthy documentation processes can pose challenges. Additionally, interest rates may be relatively high, and the repayment terms might be less flexible.
2. Non-banking Financial Corporations (NBFCs)
NBFCs provide an alternative to banks for MSME financing. With over 9,500 registered NBFCs in India, these entities offer collateral-free MSME loans with advantages such as flexible eligibility criteria and a simplified approval process.
NBFCs often cater to small business owners with slightly lower credit scores and limited business experience. Furthermore, they can offer lower interest rates, enjoying greater flexibility compared to regulated bank rates.
3. Government’s Credit Schemes
Governments at both the central and state levels in India have introduced credit schemes specifically designed to support MSMEs. To access funding through these schemes, business owners can approach authorised financial institutions or central nodal agencies designated by the government.
These loans come with several advantages, including reliability, ease of accessibility, and low-interest rates. Notable government-backed MSME loan schemes include:
- The Credit Linked Capital Subsidy Scheme (CLCSS)
- Pradhan Mantri Mudra Yojana (PMMY)
- Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE)
The MSME sector is referred to as the economy’s backbone. It is critical in stimulating entrepreneurship, creating jobs, and propelling technical improvements. However, access to financing remains a significant barrier for small businesses, despite programs such as the MSME loan subsidy plan providing assistance.
Thus, utilising technology through online application processes and recognising the importance of Udyam registration increases the efficiency and longevity of support offered to these critical contributors to economic growth.
Frequently Asked Questions
Q1. What is the Need for Finance in MSME?
A crucial element for the success of MSMEs is the ability to obtain credit. MSMEs rely on credit or funding to initiate and grow their businesses, whether establishing a new venture or expanding existing operations.
Q2. Is MSME Necessary?
MSME industries serve as the foundation of the economy and are alternatively referred to as small-scale industries (SSIs). The government of India offers MSME registration to businesses that fall under the categories defined by the government as Micro, Small, and Medium Enterprises (MSMEs) in the country.
Q3. What are the Features of MSME?
MSMEs play a vital role in generating employment opportunities for millions of artisans and workers. Furthermore, they actively foster entrepreneurship and the cultivation of specialised skills. Additionally, these enterprises contribute to the advancement of modernised technology, the enhancement of infrastructure, and the overall development of the sector.
Q4. Is GST Compulsory for MSME Registration?
The GST number is not obligatory during the MSME registration process for businesses or entities not necessitating GST registration. However, it’s important to note that businesses with an annual turnover exceeding ₹40 lakhs are considered taxable entities and are required to register for GST.
Q5. What are the Problems Faced by MSMEs?
The primary challenge stems from the absence of collateral or credit history for many MSMEs. Obtaining loans becomes challenging with a poor credit score. Additionally, these enterprises encounter difficulties in accessing credit due to high interest rates, intricate documentation demands, and prolonged processing times.
Q6. What is the Limit of MSME in 2023?
The Union Budget for 2023 has raised the turnover limits for tax purposes. Previously, businesses with turnovers of up to ₹2 crore and professionals with turnovers of up to ₹50 lakh were covered. The revised limits now stand at ₹3 crore for businesses and ₹75 lakh for professionals, applicable specifically to taxpayers with less than 5% of their receipts in cash.
Q7. Is There any Subsidy for MSME Loans?
Within the MSME loan subsidy scheme, qualifying businesses have the opportunity to receive an interest relief of two per cent per annum. This relief applies to their outstanding fresh or incremental term loans and working capital loans throughout the duration of the scheme’s activation.
Q8. What is the Minimum Turnover for MSMEs?
An enterprise with an investment ranging from ₹1 Crore to ₹50 Crore and an annual turnover falling between ₹5 Crore and ₹250 Crore is categorised as an MSME (Micro, Small, and Medium Enterprise).
Q9. How do I claim an MSME subsidy?
To apply for the Credit Linked Capital Subsidy Scheme (CLCSS) introduced on October 1, 2013, eligible MSEs must utilise the Online Application and Tracking System. MSEs can apply online through their Primary Lending Institutions (PLIs), from where they avail term loans, facilitating a streamlined and efficient process for claiming subsidies.
Q10. Is MSME renewed every year?
It is crucial to highlight that the Udyam registration certificate is a lifelong document, eliminating the need for any renewal. Once registered, businesses can rely on the Udyam certificate without the requirement for periodic updates or revalidation.