Apply for MSME/SME Loan Schemes in India

Types of MSME loans

Term loans

Term loans are loans provided by banks or financial institutions to businesses for a fixed tenure, typically used for purchasing long-term assets like machinery, land, or infrastructure. These loans are repaid in equated monthly instalments (EMIs) over a period ranging from one year to several years. Interest rates are generally higher than those for working capital loans, and repayment schedules are fixed in advance. The loan amount, tenure, and interest rates depend on the financial health of the borrower, the project’s feasibility, and other factors. Banks require a detailed project report before sanctioning the loan and may ask for collateral as security. These loans play a crucial role in business expansion and asset development.

Working capital loans

Working capital loans are short-term loans designed to help businesses meet their day-to-day operational expenses. These loans are essential for covering the gap between a company's short-term liabilities and assets, such as raw materials, inventory, and salaries. In India, banks and financial institutions provide working capital loans based on the company's operational cycle and the nature of its business. The amount of the loan is typically determined by the business's financial health, past performance, and creditworthiness. These loans help maintain liquidity and ensure smooth business operations without affecting long-term financial stability. Interest rates are usually lower than term loans, but the tenure is short, usually ranging from 12 months to a few years.

Bill discounting

Bill discounting is a financial service where a business sells its receivables or bills to a bank or financial institution at a discounted rate in exchange for immediate cash. In India, this process helps businesses improve their cash flow by reducing the waiting time for payment from clients. The business typically receives a percentage of the invoice value, with the balance paid once the client settles the bill. Bill discounting is useful for companies that need quick funds to continue operations but do not want to take out a traditional loan. The bank or financial institution charges interest on the discounted amount, and this service is common in industries with long credit cycles or large orders.

Overdraft facility

An overdraft facility is a type of short-term borrowing arrangement provided by banks to businesses or individuals. It allows the account holder to withdraw more money than what is available in their account, up to a certain limit. In India, overdrafts are commonly used by businesses to manage temporary cash flow gaps. The limit is generally decided based on the financial stability of the account holder and their business requirements. Interest is charged only on the overdrawn amount, and the overdraft must be repaid within a short period, usually within a year. This facility provides flexibility as it can be accessed anytime the account holder needs additional funds, making it a convenient option for managing working capital needs.

CGTMSE (Credit Guarantee Fund Scheme for MSMEs)

The Credit Guarantee Fund Scheme for Micro, Small, and Medium Enterprises (CGTMSE) is an initiative by the Government of India to encourage financial institutions to lend to MSMEs without the need for collateral. Under this scheme, the government provides a guarantee to banks and financial institutions for loans given to eligible MSMEs, thereby reducing the risk for lenders. The scheme promotes financial inclusion by enabling small businesses to access credit without the burden of providing tangible security. MSMEs can avail of loans for working capital and term loans under this scheme. The maximum guarantee cover is up to 85% of the loan amount, depending on the loan size and borrower category, ensuring better access to finance for smaller enterprises.

Collateral-free loans

Collateral-free loans are loans provided by financial institutions or banks without requiring the borrower to pledge any assets as security. These loans are typically available to small businesses, start-ups, and individuals with good credit histories and repayment capacity. In India, various government schemes such as MUDRA and CGTMSE offer collateral-free loans to promote entrepreneurship and support micro, small, and medium enterprises (MSMEs). These loans help borrowers who may not have valuable assets to offer as collateral, making it easier for them to access credit. While these loans do not require physical assets, they often come with higher interest rates to compensate for the lack of collateral, and lenders may assess the borrower’s financial health more carefully.

MUDRA loans

MUDRA (Micro Units Development and Refinance Agency) loans are government-backed loans aimed at providing financial assistance to micro, small, and medium enterprises (MSMEs) in India. Under the MUDRA scheme, businesses in the non-corporate, non-farm sector can access loans for starting or expanding their ventures. The loans are available under three categories: Shishu (up to Rs. 50,000), Kishore (Rs. 50,001 to Rs. 5 lakh), and Tarun (Rs. 5 lakh to Rs. 10 lakh). These loans are intended to encourage entrepreneurship, particularly in rural and underserved areas. MUDRA loans are collateral-free and have lower interest rates than regular business loans, making them an attractive option for small business owners. The scheme promotes financial inclusion by providing easier access to credit for small entrepreneurs.

Stand-Up India loans

The Stand-Up India scheme is a government initiative aimed at promoting entrepreneurship among women and scheduled caste or scheduled tribe (SC/ST) individuals. Under this scheme, banks provide loans ranging from ₹10 lakh to Rs. 1 crore to eligible borrowers for setting up greenfield projects in the manufacturing, services, or trading sectors. The scheme’s objective is to foster economic independence by encouraging new business ventures. In the Indian context, Stand-Up India loans are collateral-free and are designed to address the funding gap faced by women and marginalized communities. These loans are available with flexible repayment terms and are part of the government’s broader efforts to support inclusive growth and economic empowerment.

Export credit

Export credit refers to the financial assistance provided to exporters by banks or financial institutions to support their international business operations. In India, export credit is essential for businesses involved in exporting goods and services, as it helps manage the risks associated with international trade. The Export-Import Bank of India (EXIM Bank) plays a key role in providing export credit to Indian exporters. These loans are typically offered at competitive interest rates and can be used for financing export activities such as production, procurement, and shipment of goods. The government also offers insurance and guarantee schemes to protect exporters from payment defaults, making it easier for businesses to explore global markets and increase exports.

Government subsidy loans

Government subsidy loans are loans provided at a subsidised interest rate or with certain financial benefits, typically aimed at specific sectors or groups in need of financial support. In India, these loans are offered under various government schemes to promote economic development and support businesses in sectors like agriculture, rural development, education, and small industries. The government provides financial assistance either through direct subsidies or by reducing the interest rates on loans provided by banks and financial institutions. These loans help reduce the financial burden on borrowers and make credit more accessible, particularly for those who may not qualify for standard loans. The aim is to promote social and economic development while improving access to essential services and business opportunities.

Features of MSME Loan

Here are some key features of MSME loans:

• Flexible loan amounts: MSME loans offer varying loan amounts to suit the diverse needs of small and medium enterprises, ranging from a few lakhs to several crores, depending on business requirements.
• Competitive interest rates: These loans typically come with competitive interest rates, making borrowing more affordable for small businesses, helping them manage repayments effectively.
• Quick disbursal: MSME loans often feature a fast approval and disbursal process, ensuring that businesses get timely access to funds when needed for operations or expansion.
• Minimal documentation: The application process usually requires minimal documentation, reducing the administrative burden on business owners.
• Flexible repayment tenure: Repayment terms are generally flexible, with tenures ranging from a few months to several years, allowing businesses to choose a term that aligns with their cash flow.

In addition to considering the features of MSME loans, businesses should also make sure they comply with the Shop and Establishment Act, as this is a crucial regulatory requirement for operating legally within India.

Eligibility criteria for MSME/ SME loan

MSME loans are available for all micro, small, and medium enterprises (MSMEs) involved in trading, manufacturing, or services.

Basic eligibility criteria:

• The business must have a credit score of 750 or more.
• It should earn at least Rs. 2 lakhs per year and have a minimum annual turnover of around Rs. 10 lakhs.
• The business must have a good track record of loan repayment and overall financial stability.
• There should be no past defaults on loans from any financial institution.
• The person applying for the loan, or the authorised signatory of the business, must be between 21 and 65 years of age.
• The applicant or authorised person must have at least three years of work experience in the business and five years of overall experience in the industry.

Who can apply?

Individuals, business owners, and MSMEs involved in services, trading, or manufacturing can apply. The types of eligible business setups include:

• Private limited companies
• Public limited companies
• Sole proprietorships
• Partnership firms
• Limited Liability Partnerships (LLPs)

Documents needed for MSME Loan

Here's a table outlining the documents needed for an MSME (Micro, Small, and Medium Enterprises) loan:

Eligible entities that can apply for MSME loans

You, as an individual, startup, MSME, business owner, or self-employed professional, along with women entrepreneurs and individuals from SC/ST/OBC categories, are eligible for MSME loans. Entities such as Private or Public Limited Companies, Sole Proprietorships, Partnership Firms, and Limited Liability Partnerships (LLPs) operating in trading, services, and manufacturing sectors can also apply.

Purpose of MSME Loans

MSME Loans serve various business needs:

1. Start or expand your enterprise.
2. Procure plant & machinery, including testing or lab equipment, electrical appliances, etc.
3. Construct buildings or acquire land/commercial properties.
4. Introduce new product lines or settle supplier bills through Bill Discounting.
5. Fulfil working capital needs like salaries, raw material purchase, inventory stocking, and marketing.
6. Invest in machinery/equipment or vehicle fleets.
7. Obtain additional funds for diverse business requirements.

MSME Loan Schemes initiated by the Govt. of India

Government-initiated MSME loan schemes offer financial support to Micro, Small, and Medium Enterprises (MSMEs). These initiatives aim to facilitate easy access to credit and promote entrepreneurship among MSMEs. Some popular schemes include:

• CGTMSE: Credit Guarantee Fund Trust for Micro and Small Enterprises
• CLCSS: Credit Linked Capital Subsidy Scheme
• Credit Guarantee Scheme
• Pradhan Mantri Mudra Yojana
• National Small Industries Corporation (NSIC)) Subsidy
• PMEGP: The Prime Minister Employment Generation Programme
• PMRY: Prime Minister’s Rozgar Yojana
• PSB Loans in 59 minutes under SIDBI
• Startup India Scheme

Collateral for MSME loan

Collateral for MSME loans typically includes tangible assets like property, land, machinery, or equipment. Lenders may also accept financial assets like fixed deposits, insurance policies, or stocks as collateral. The value of the collateral is assessed based on factors such as market value, depreciation, and future earning potential. Providing collateral reduces the lender's risk, thereby increasing the chances of loan approval and favourable terms. However, it's essential for borrowers to carefully consider the implications of pledging collateral, as defaulting on the loan could lead to the loss of these assets.

How to calculate MSME / SME loans EMI

EMI (Equated Monthly Installment) for MSME or SME loans can be calculated using mathematical formulas or online Business Loan EMI calculators provided by banks and financial institutions. The EMI calculation considers factors such as loan amount, interest rate, and loan tenure. The formula for EMI calculation involves the principal amount, interest rate, and loan tenure. It's essential to consider the impact of interest rates on EMI and choose a repayment tenure that aligns with the business's cash flow. Regularly paying EMIs on time helps maintain a good credit history and ensures smooth loan repayment.

The formula to calculate the Equated Monthly Installment (EMI) for an MSME or SME loan is:

EMI = P*r/1-(1+r)^{-n}

Where:

P = Principal loan amount

R = Monthly interest rate (annual interest rate divided by 12 and expressed as a decimal)

N = Loan tenure in months

This formula calculates the fixed monthly installment amount that includes both principal and interest components. It's essential to ensure that the values used in the formula are consistent with the terms of the loan agreement.

MSME / SME loans fees and interest rates

How to Apply for MSME Loan Online

To apply for an MSME loan online, follow these steps:

Step 1: Visit your preferred bank's official website.

Step 2: Log in if you're an existing customer; if not, create an account.

Step 3: Fill in mandatory details, including personal, income, and business information, and loan requirements.

Step 4: Submit the loan application form online.

Step 5: Upload mandatory documents, such as personal, business, and income proofs.

Step 6: A bank executive will contact you for further procedures.

Step 7: After document verification, the loan is approved.

Step 8: The approved funds are disbursed to your business account within the specified timeframe.