Micro, Small and Medium Enterprises (MSMEs) are small-scale businesses that need a regular source of funds for smooth operations. They might need additional funds for the following purposes:
- Meeting their working capital needs
- Enhanced seasonal demand which requires additional production
- Hiring an additional labour force
- Buying plant, machinery and equipment
- Buying a commercial vehicle
- Increased marketing expenses
- Paying off liabilities, etc.
Being small-scale businesses, MSMEs might not have sufficient cash reserves at their disposal. Moreover, infusing additional capital can prove challenging. Some businesses try to generate funds through their cash flow but they might not be able to ensure adequate financing which fulfils their financial needs. Other businesses that might not have the desired cash flow and need additional funds look towards external sources of funding. In such cases, MSME loans can prove to be a game-changer.
Key Highlights
- MSME loans fund the varied financial needs of small businesses and prove useful
- There are different types of loans for the different needs of businesses
- MSME loans are available to businesses that meet the specified eligibility criteria of lenders and submit the required documents
What is an MSME loan?
MSME loans are usually multipurpose loans which can be used for funding like working capital requirements, expansion of current business, and purchase of additional raw materials or equipment.
MSME loans can be taken from any financial institution. Shriram Finance is one such financial institution which offers MSME loans at attractive rates.
Key Features and Benefits of MSME Loans
Some of the salient features of an MSME loan are as follows:
Interest Rate
Financial institutions charge a certain interest on MSME loans. This interest rate varies across lenders. You can compare different lenders to get the most competitive rates. For example, Shriram Finance offers MSME loans at interest starting from 15%*p.a.
Types of Loans
MSME loans can be secured or unsecured. Unsecured loans are those which are issued without collaterals or pledging an asset. Secured loans, on the other hand, require collateral security against the loan.
Furthermore, MSME loans come in different variants like term loans, working capital loans, equipment financing, and bill discounting.
Foreclosure Charges
MSME loans might attract certain foreclosure charges, in case the borrower wishes to close the account prematurely. These charges depend upon the lender’s lending policies. Like, Shriram Finance allows the borrower to foreclose his loan at charges ranging from 3% to 6% of the total outstanding amount. The charges, however, depend upon the remaining loan tenure as well as on the outstanding principal amount. Plus, there is a specified period after which foreclosure is allowed.
Eligibility for an MSME Loan
Businesses seeking an MSME loan must fulfil certain eligibility criteria, which depend on the lender. However, some of the common parameters are as follows -
- They should be Indian citizens and fall under the minimum and maximum age criteria.
- They have to provide valid permanent residential proof and should have been residing in the same address for a minimum specified period, usually 1 year.
- They have to have been in their existing business for a minimum of 3 years.
- A minimum yearly turnover is needed which might start from ₹20 lakhs onwards.
- They will have to undergo the credit evaluation process and fulfil the same.
- They must provide a formal declaration of all their credit obligations
- Specified businesses are offered the MSME loan. Not all businesses might qualify for the loan.
Did You Know?
A minimum credit score is needed to qualify for the MSME loan. The minimum score is determined by lenders. However, in most cases, the minimum score is usually 650 or 700. Also, the score determines the loan interest rate and other terms. If you have a high score, you can get lower interest rates, higher repayment tenures, and a high loan amount. Lower scores mean unfavourable loan terms and your application might also get rejected.
Documentation Required
The borrower needs to submit a few documents while applying for a loan. These documents are:
- Identity proofs such as Aadhar Card, Driving License, PAN card etc.
- Residential proofs such as ration cards, electricity bills, lease agreements etc.
- Financial Documents of the borrowing concern like the profit and loss statement for the last 3 years, projected turnover, or the balance sheet for the past 6 months, etc.
Benefits of an MSME Loan
The MSME loan is a popular choice among businesses given the following benefits –
Easy Availability and Processing
MSME loans are available online and processed easily. The funds are granted at the earliest allowing businesses to meet their needs.
Minimal Paperwork
The borrower does not need to submit too many documents to procure this loan. These loans are disbursed with very little documentation process and hence, are considered to be hassle-free.
Helps in Business Growth
By providing the desired funds to MSMEs, the loan allows them to operate efficiently and grow. This can aid in improving the profitability of the business too.
The interest rates on MSME loans are affordable and don’t tax a business’s finances. Moreover, the flexible repayment tenure allows MSMEs to repay the loan affordably.
Conclusion
The financial needs of an MSME can be recurrent or a one-time affair. In either of these instances, an MSME loan proves to be a great help. Understand the different aspects of the loan and check your eligibility before applying for the loan. Choose a loan with affordable interest rates and flexible repayment tenures to ease the loan repayment.
Shriram Finance can be an ideal choice for availing of an MSME loan. With a range of loan options, at affordable interest rates and quick sanctions, you can get the desired funds for your business without hassles. Furthermore, Shriram Finance has an impressive track record of financial success for over 50 years. With over 3600 offices across the country, they are both reliable and offer easily accessible loans.
FAQs
1. What is the borrowing limit for MSME?
The borrowing limit for MSME loans varies between different financial institutions and it also depends upon the borrower’s credibility and funding requirement.
2. Can a start-up get an MSME loan?
Yes, start-ups can apply for an MSME loan.
3. What is the capital subsidy for MSME?
The capital subsidy for MSMEs in India typically ranges from 12% to 15% of the eligible investment in plant and machinery. This financial incentive is designed to promote technology upgrades and enhance competitiveness within the sector.
4. What is the minimum loan amount for MSME EDI loans?
The minimum loan amount for MSME EDIs varies across lenders and might start from as low as ₹10,000.
5. What is the limit of collateral-free loans for MSMEs?
The limit for collateral-free loans for MSMEs varies across institutions. You should check the limit with the lender you choose.