What is an MSME loan? The expanded form of this acronym is micro, small, and medium enterprises. MSME loans are a type of business loan through which individuals, MSME, SMEs, and start-ups can get credit. Primarily aimed at creating a good environment for start-ups and small businesses, the Government of India has been encouraging MSME businesses through the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006.
Therefore, true to the MSME full form, this segment is one of the most potent engines of the economy and it would not be erroneous to state that funding them could fuel India’s growth. Yet, MSMEs are deterred by a lack of access to credit for investing in business and putting into effect expansion plans, often derailing the entrepreneurs from their vision.
So, here are a few aspects which you will need to consider while applying for this loan –
Documents Required for MSME Business Loan Application
- Duly filled-out Application form with passport-sized photographs
- KYC documents of applicant and co-applicants that include Passport, Aadhar card, Voter’s ID card, Driving License, PAN Card, and Utility Bills (Telephone, Electricity Bills)
- Income Proof
- Business Address and Vintage Proofs
- Last 6 months’ bank statement along with bank details
- Business Establishment Certificate, or Incorporation Letter
- Proof of belonging to SC/ST or OBC category, if applicable
- Any other document required by the bank/NBFC
- Lot of MSMEs rely on support from the government in the form of subsidies and loan schemes. The MUDRA (Micro Unit Development and Refinance Agency) loan is an initiative by the Government to support small businesses at various stages of their existence.
- The CGTMSE (Credit Guarantee Funds Trust for Micro and Small Enterprises) is a system for credit relief that covers a portion of the loan amount without a guarantee from a third party or any collateral to support it. This encourages banks to lend to MSME.
- The PMEGP (Prime Minister’s Employment Generation Programme) is a credit-linked subsidy program that aims to generate employment through MSMEs. Under this program, the government provides a subsidy of between 15-35% of the loan amount based on the category and location of the business.
- Women entrepreneurs are also supported by the Government through the Mahila Uddyami scheme, which provides subsidies and assistance with regards to getting loans.
- If you are upgrading the technology used by your MSME business, you may be eligible for a 15% capital subsidy subject to a maximum of Rs. 15 lakhs on loans taken for the upgrade.
Purpose of MSME Loans
- To meet working capital requirements
- For new and existing business expansion
- To manage business cash flow
- To buy or install new equipment or machinery
- For the purchase of raw materials, vehicles, tools, etc.
- To stock up inventory
- To pay off rent, salaries, hire staff, train staff, and so on
Where can you apply for an MSME Loan?
The RBI has prescribed MSME lending targets for all private and public-sector banks. Domestic scheduled commercial banks (except regional rural banks) and foreign banks with 20+ branches are to mandatorily allocate 7.5% of their Adjusted Net Bank Credit (ANBC) to the microenterprises sector.
With a traditional business loan, you would have to pledge the security. And at the same time, you have a very limited payment option. However, most lenders and financial institutions offer collateral-free business loans to help the business owner get the maximum benefit from the loan amount. Moreover, it makes the loan for the business owners a very easy method. A business loan that requires offering collateral would let you go through the tension. When you have the option of having an SME business loan without collateral, it will help you in the long run.
Do note that this isn’t an exhaustive list and the lender may ask you for additional documents before approving your business loan, which we have listed above.
How to Apply for an MSME Loan?
Applying for an MSME loan can even be done by visiting the nearest branch of your lender. You need to fill in all relevant details in your MSME loan application and submit it to your lender along with the necessary documents.
Then, your lender will verify your application and documents for authenticity. Once that is done, your SME loan will be sanctioned. Shortly after, the loan amount will be disbursed to your bank account.