MSME / MSE Loan Information

An MSME loan or an SME loan is a credit facility extended by banks, small finance banks, and non-bank finance companies such as IIFL Finance to micro, small, and medium enterprises.

MSME loans are either unsecured or secured loans given by financial institutions to meet various expenses to businesses as well as individuals, sole proprietors and partnership firms. Startups are also eligible for MSME loans.

These loans can be availed for a wide range of purposes, including for investments in plant and machinery, buying inventory, and making payments to staff or vendors.

Features of MSME Loan

MSMEs play an important role in India's economic growth, especially in the context of employment generation. The government has launched a number of schemes to ensure timely and cheaper credit is made available to these units. Banks and NBFCs have designed flexible MSME loan products. Here are some key features of MSME loans:

1. Loan amount: MSME loans can be of varying amounts depending on the requirement of businesses. Most banks and NBFCs provide loans starting from Rs 50,000. The loans can go up to Rs 10 crore or even higher.

2. No collateral: Lenders do not seek any collateral for unsecured MSME loans, and hence small business owners don't have to worry about providing any security. Secured loans, however, do require a collateral.

3. Interest rate: The MSME loan interest rate depends on the lending institution and the nature of the business of the applicant.

4. Flexible repayment: Banks and non-bank finance companies provide flexible repayment options for the repayment of MSME loans. The tenure is designed based on the cash flows and other receivables. Usually, the tenure ranges from one to five years but it can be mutually decided by the lender and borrowers. There is also an option for part-prepayment.

5. Digital application: The MSME loan can be applied for online, cutting down on the hassle of paperwork, which often results in delays in availing loans. Most lenders provide an end-to-end digital application process.

6. Approval process: Once all the documents are submitted, lenders undertake a verification exercise. Post that, the MSME loan amount is disbursed within three-four days of the application.

7. Processing fees: Borrowers may have to pay charges such as processing fees, which usually range between 2-3% of the loan amount. There are no other hidden charges levied on borrowers.

Eligibility Criteria for MSME Loan

1. Nationality: Only Indian nationals can apply for MSME loans.

2. Age: The minimum age of the applicant must be of 23 years and maximum age of 65 years (at the end of loan tenure)

3. Business Vintage: Lenders keep a minimum number that business should be in existence to be eligible for MSME loan apply. This also depends on the amount of loan. Usually, a minimum of 6 months of business vintage is required.

4. Nature of Business: The business for which the loan is taken should be legally allowed as per existing laws. Applicants with blacklisted business will not be eligible for availing loans.

5. Documents: Borrowers seeking to complete the MSME loan apply process need to furnish documents such as PAN Card, proof of business ownership, bank statement, and past payment history. For instance, in addition to the KYC documents, IIFL Finance requires at least 12 months of bank statements of the main operative bank account to review the application.

6. Credit Score: A decent credit score helps in faster verification of SME loan at an attractive rate.

Purpose of MSME Loan

Due to a lack of easy access to finance, the growth of small businesses is often restricted. An MSME loan for new business, hence, can help entrepreneurs grow their operations multifold by helping them in a variety of ways.

1. Purchasing assets such as plant and machinery or any particular hard assets that are core to the business.

2. Buying pre-owned or new fleet of vehicles and acquiring commercial property to expand existing business.

3. An MSME loan for new business can especially be helpful in plugging cash flow mismatch by opting for working capital loans to meet expenses such as salaries, stocking up inventories, etc.

4. Launching a new range of products as well as diversifying in newer geographies.

5. As part of the growth initiative, a part of the MSME business loan can be used on marketing and advertising that will help small businesses to reach to wider set of audience.