MSME Loan: Everything You Need to Know

Aside from an MSME loan, financial institutions also offer these loans under several government schemes like:

• Credit guarantee fund trust for micro and small enterprises (CGTMSE).
  
• Prime Minister’s employment generation programme (PMEGP).
• Micro unit development and refinance agency (MUDRA Loan).

Key features of Budget 2025-26 for MSMEs (February 2025)

The Union Budget for 2025-26 unveiled several key measures aimed at supporting and promoting the growth of Micro, Small, and Medium Enterprises (MSMEs):

Revised investment and turnover thresholds: The investment and turnover limits for MSMEs will be updated, with investment limits increasing 2.5 times and turnover limits doubling

Updated limits for different enterprise types

• Credit guarantee for MSMEs: The credit guarantee cover for micro and small enterprises will be increased from Rs. 5 crore to Rs. 10 crore, unlocking an additional Rs. 1.5 lakh crore in credit over the 5 five years
• Startups: The credit guarantee cover for startups will be raised from Rs. 10 crore to Rs. 20 crore, with a reduced 1% guarantee fee for loans in 27 priority sectors under Atma Nirbhar Bharat
• Exporter MSMEs: The term loan guarantee cover for established exporters will be enhanced to Rs. 20 crore

Additional measures for MSMEs in budget 2025

• Credit cards for micro enterprises: Customised credit cards with a limit of Rs. 5 lakh will be issued to micro enterprises registered on the Udyam portal, with a target of issuing 10 lakh cards in the first year
• Startup fund of funds: The Alternative Investment Funds (AIFs) for startups, with a total value of Rs. 91,000 crore, will receive an additional Rs. 10,000 crore to expand their reach
• Support for first-time entrepreneurs: A new initiative will provide term loans of up to Rs. 2 crore over the next five years to 5 lakh first-time entrepreneurs, including women, SCs, and STs

New definition of MSME

The Government of India introduced a revised definition of MSME on May 13, 2020. Here are the key points of the new definition:

1. Change in criteria: The classification of MSMEs now considers both investment and annual turnover, whereas previously only investment was considered.
2. Increased investment limit: The investment limit for MSME classification has been raised, allowing more firms and enterprises to qualify for MSME benefits.
3. Uniform criteria: The criteria for classifying MSMEs are now uniform for both Manufacturing and Services Enterprises. The details are provided in the table below:
4. MSME Loans: Micro, Small, and Medium Enterprises can access MSME loans for business expansion or setting up new enterprises. The interest rates for MSME loans start at 7.65% p.a., and the loan amount sanctioned can range from as low as Rs.50,000 to several crores. The repayment tenure can extend up to 15 years, depending on the sanctioned loan amount.

These changes aim to provide greater support and opportunities for MSMEs to grow and thrive in the Indian business landscap.

Purpose of MSME loans

The purpose of MSME loans is to provide financial assistance to Micro, Small, and Medium Enterprises (MSMEs) in order to safeguard their stability and future growth. These loans can be utilized for various reasons, depending on the specific needs of the entity. Some common purposes for MSME loans include:of MSME loans

1. Expansion or Diversification: Funding the expansion or diversification of existing business operations to reach new markets or increase production capacity.
2. Establishing or Starting a New Business: Providing capital to establish a new business venture or start a new unit within an existing enterprise.
3. Debt Consolidation: Paying off existing debts to improve financial health and reduce financial burden.
4. Purchase of Assets: Financing the purchase of new plant and machinery, equipment, or other assets required for business operations.
5. Working Capital: Meeting short-term working capital requirements to ensure smooth day-to-day functioning of the business, including covering operational expenses, purchasing inventory, or managing cash flow.

Overall, MSME loans serve as a vital resource for MSMEs to address their financial needs and support their growth and sustainability in the competitive business environment.

Types of MSME Loans

NBFCs and banks offer a variety of loan products tailored to the needs of Micro, Small, and Medium Enterprises (MSMEs) engaged in manufacturing, trading, or service operations. These loan products vary based on factors such as the organization's requirements, loan tenure, interest rates, collateral requirements, and urgency of funds. Some common types of MSME loans include:

1. Term Loans: These are traditional loans with a fixed repayment schedule and are typically used for long-term investment needs such as purchasing machinery or expanding facilities.
2. Line of Credit/ Overdraft Facility: Provides MSMEs with access to a pre-approved credit limit that they can draw upon as needed. Interest is charged only on the amount utilized.
3. Bill Discounting or Invoice Discounting: MSMEs can receive funds by selling their accounts receivable (invoices) to a financial institution at a discount.
4. Point of Sale Finance: Offers financing based on the MSME's future credit or debit card sales, often used by retail businesses.
5. Bank Guarantee: A guarantee provided by a bank on behalf of the MSME to ensure payment to the beneficiary in case of default or non-performance of contractual obligations.
6. Pradhan Mantri Mudra Yojana: A government scheme aimed at providing loans up to Rs. 10 lakhs to non-corporate, non-farm small/micro-enterprises.
7. Asset-Backed Loans: Loans secured by collateral such as property, equipment, or inventory.
8. Business Loans specifically targeting Women Entrepreneurs: Specialized loan products designed to support women-owned MSMEs, often offering preferential terms or lower interest rates.

These loan products cater to the diverse financing needs of MSMEs and play a crucial role in supporting their growth and development.

MSME loans come with specific eligibility criteria, and business owners must meet all terms mentioned to avail of the benefits. Bajaj Finance offers MSME loans of up to Rs. 80 lakh to help enterprises meet their immediate funding requirements. It comes with minimum business loan eligibility and documentation requirements to simplify loan processing. This loan is available at affordable business loan interest rates and can be repaid over a flexible tenure. With Bajaj Finance, businesses can opt to part-prepay or foreclose the loan account before the tenure ends at nominal charges.