MSME is short for Micro, Small, and Medium Enterprises. It’s a Government of India Ministry ( MSME website) department with a focus on medium and small entrepreneurial enterprises. MSME Loan is the loan to provide working capital and other business loans to MSME-recognized firms.
‘Make in India’ program is also a flagship project of the MSME Ministry. For this purpose, the Ministry devised special financial schemes of which the main is the MSME Loan.
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What is an MSME
As per notification dated 1st June 2020 the definition of any enterprise to be considered under MSME is:
(i) a micro-enterprise, where the investment in Plant and Machinery or Equipment does not
exceed one crore rupees and turnover does not exceed five crore rupees;
(ii) a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed
ten crore rupees and turnover does not exceed fifty crore rupees;
(iii) a medium enterprise, where the investment in Plant and Machinery or Equipment does not
exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.
What is the difference between MSME & SME
Here is a quick list of differences between MSME and SME:
| Micro Enterprise | Small Enterprise | Medium Enterprise |
| A microenterprise is a tiny business that employs fewer than ten people | A small business, often known as a small enterprise, is a company that employs a small number of people (10 to 50) and does not have a large number of sales. | Enterprises with fewer than 250 employees fall within the category of medium-sized businesses. |
What is an MSME Loan?
MSME loan is a type of business loan through which individuals, MSMEs, SMEs, and Startups can get loans. These loans are mostly unsecured loans for business growth & expansion. Most banks and non-bank financial institutions (NBFCs) make SME and MSME loans without collateral or security from borrowers.
Who is eligible for MSME Loan?
Here is the quick list of eligibility criteria for an MSME Loan:
- Applicants must be between 25-55 years of age.
- Applicants’ business vintage must be more than 3 years.
- They should have filed Income Tax Returns for the business for at least one year.
- Applicants’ credit score should be 750 or above.
Which types of loans are under MSME Loans?
Mainly term loans and working capital loans. Working capital loans are offered to MSMEs by banks to fulfill their daily cash requirements. The term loans are offered to MSMEs for capital expansion, capital expenditure, or buying fixed assets.
Still, there are more types of loan structures possible under MSME Loans. Here is the complete list of types of MSME loans:
Secured MSME Loans
Secured MSME loans are types of business loans that require the borrower to pledge assets as collateral to secure the loan. These assets can include property, equipment, inventory, or receivables. By providing collateral, the borrower reduces the lender’s risk, which can result in lower interest rates and more favorable terms.
Examples:
- Machinery Loans: A manufacturing MSME might secure a loan by pledging its machinery. The loan can then be used to upgrade or purchase additional equipment.
- Property-Backed Loans: An MSME might use its commercial property as collateral to secure a loan for business expansion or renovation.
- Inventory Financing: A retail business can use its inventory as collateral to secure a loan for purchasing more stock during peak seasons.
Types of Collateral Required
The types of collateral that can be used to secure an MSME loan vary based on the lender’s policies and the nature of the business. Common types include:
- Real Estate: Commercial or residential property owned by the business or its owners.
- Machinery and Equipment: Manufacturing equipment, office equipment, or vehicles used in the business.
- Inventory: Goods and materials held by the business for sale or production.
- Accounts Receivable: Outstanding invoices owed to the business by its customers.
- Fixed Deposits: Bank deposits that can be pledged as collateral.
Benefits and Risks
Benefits:
- Lower Interest Rates: Secured loans typically offer lower interest rates compared to unsecured loans because the lender’s risk is reduced by the collateral.
- Higher Loan Amounts: Businesses can often secure larger loan amounts when they provide collateral.
- Longer Repayment Terms: Lenders may offer more flexible and extended repayment terms for secured loans.
- Credit Building: Successfully repaying a secured loan can help build the business’s credit profile.
Risks:
- Asset Seizure: If the borrower defaults on the loan, the lender can seize the collateral to recover the loan amount.
- Asset Depreciation: The value of the collateral can depreciate over time, which might not cover the outstanding loan balance in case of default.
- Legal and Administrative Costs: The process of pledging and reclaiming collateral can involve additional legal and administrative costs.
Suitable Businesses
Secured MSME loans are particularly suitable for businesses that have substantial assets to pledge and need significant capital for growth or operational purposes. Examples include:
- Manufacturing Businesses: These businesses often require substantial investment in machinery and equipment, making secured loans a viable option.
- Retail Businesses: Retailers can use their inventory as collateral to secure loans for stocking up during high-demand seasons.
- Service Providers: Businesses such as transportation or logistics companies can use their fleet as collateral for secured loans.
- Real Estate Firms: Firms that own commercial properties can use these assets to secure loans for further development or expansion.
Unsecured MSME Loans
Unsecured MSME loans are types of business loans that do not require the borrower to provide any collateral. These loans are granted based on the borrower’s creditworthiness, business performance, and financial health. Because there is no collateral involved, these loans often come with higher interest rates compared to secured loans.
Examples:
- Working Capital Loans: Small businesses can obtain unsecured loans to cover day-to-day operating expenses such as payroll, inventory purchases, and utility bills.
- Short-Term Loans: Businesses might secure short-term financing to cover immediate expenses or to take advantage of a business opportunity without needing to pledge any assets.
- Business Credit Cards: These are a type of unsecured loan that provides businesses with a revolving line of credit to manage expenses and improve cash flow.
No Collateral Required
Unsecured MSME loans do not require any form of collateral, which means businesses do not have to pledge assets such as property, equipment, or inventory to secure the loan. Instead, lenders rely on the credit history, financial statements, and business performance to assess the borrower’s ability to repay the loan.
Benefits and Risks
Benefits:
- No Asset Risk: Since no collateral is required, businesses do not risk losing valuable assets if they default on the loan.
- Simpler Application Process: Without the need to assess and verify collateral, the loan application process is typically faster and simpler.
- Flexibility: Unsecured loans offer flexibility in terms of usage, allowing businesses to use the funds for various needs such as working capital, expansion, or marketing.
- Building Credit: Successfully repaying an unsecured loan can help businesses build a strong credit history, which can be beneficial for future borrowing.
Risks:
- Higher Interest Rates: Due to the higher risk for lenders, unsecured loans usually come with higher interest rates compared to secured loans.
- Lower Loan Amounts: Lenders might limit the loan amount available without collateral, which could be insufficient for larger financing needs.
- Strict Eligibility Criteria: Lenders often require a strong credit history and solid financials, making it harder for new or struggling businesses to qualify.
- Impact on Personal Credit: Some lenders might require a personal guarantee, meaning the owner’s personal credit could be affected in case of default.
Suitable Businesses
Unsecured MSME loans are particularly suitable for businesses that lack substantial assets to pledge as collateral or prefer not to risk their assets. Examples include:
- Service-Based Businesses: Companies in the service industry, such as consulting firms, marketing agencies, or IT services, often have fewer tangible assets but require funds for operational expenses.
- Retail and E-commerce Businesses: These businesses may need quick access to capital to manage inventory and cash flow without having significant collateral.
- Startups: New businesses without significant assets can benefit from unsecured loans to fund initial operations and growth.
- Small Businesses with Strong Credit: Businesses with a good credit history and stable cash flow can leverage unsecured loans to finance various needs without tying up assets.
How do I register for MSME Loan?
Log in to the MSME online application website: https://msme.gov.in/online-application.
- Enter Aadhar details, PAN details, social category and gender, MSME number, investment amount, etc.
- Gather the documents required for the registration.
- Submit the application process.
