MSMEs are divided into two company categories under the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006: manufacturing and service. It’s interesting to note that the government has designated the MSME sector as a priority sector, alongside industries like agriculture, education, and housing. Thus, MSME loans are considered lending to priority sectors and have the corresponding advantages.

What is an MSME loan?

An MSME (Micro, Small and Medium Enterprise) loan is an unsecured commercial loan made available to new and small firms that meet the requirements. The amount of the loan, the applicant’s profile, and the track record of the business all affect the repayment terms and interest rates for MSME loans.

Facts about MSME loans

Before applying, prospective borrowers must understand the specifics of an MSME loan, including what it is, what it may be used for, how it differs from other financing options, and other terms and conditions. 

Lenders

MSME loans are provided by a large number of banks, both public and private, as well as NBFCs. NBFCs often offer better service, a quicker approval procedure, more flexibility, and more lenient payback terms than banks, especially state-run banks. 

Borrowers

MSMEs are eligible for loans, not just companies. In fact, MSME loans are available to startups, sole proprietorships, partnership firms, self-employed individuals, and women business owners. 

Loan amount

The amount of the loan varies from lender to lender and is based on a variety of variables. These include the borrower’s eligibility, actual need, and capacity for repayment. The sum can range from one lakh rupees to fifty crore rupees. In fact, the RBI’s priority-sector regulations cover loans for startups up to Rs 50 crore.

What kind of collateral the borrower offers as security for the loan will also affect the amount. 

Collateral

Small-ticket loans are typically provided without any kind of security by banks and NBFCs. Again, each lender has different requirements. Most lenders often grant loans without collateral in the range of Rs 10–20 lakh, while some do make loans of up to Rs 40–45 lakh without any security.

If the borrower pledges a piece of land, a piece of property, or any other asset as collateral, the loan amount may rise significantly. Depending on the asset’s worth, the sum could increase to Rs 10–50 crore in such circumstances. Usually, secured loans from lenders vary from 60% to 70% of the asset’s market value.

Tenor and interest rate

Each lender sets their own terms for the loan’s duration and interest rate. Numerous variables, like the size of the business, the credit score, and cash flows, affect the MSME loan interest rate. The tenure can be as short as a few months or as long as one to two years for modest, no-collateral loans and as long as ten years for bigger, collateral-backed loans. 

Documentation

Generally speaking, unsecured MSME loans just need a small amount of documentation. These consist of the application form, identification and address documentation, the GST certificate, the evidence of business registration, and the most recent bank statements. A business strategy, as well as information on any other loans that are still outstanding from other financial institutions, may be requested by lenders in the event of secured loans in addition to requiring proof of ownership of the collateral. Individual borrowers must also provide their most recent pay slips or tax returns.

Usage

MSME loans can be applied for a range of immediate and long-term needs. These consist of financing business growth, purchasing inventory, equipment, or raw materials, enhancing infrastructure, and engaging in marketing and promotional operations. 

Conclusion

Promising entrepreneurs might accomplish their dream of starting a firm using a variety of resources. And one of the better possibilities is an MSME loan. The majority of banks and non-bank lenders readily and without any security offer smaller loans. Borrowers may use any asset, such as real estate or land, as security for larger loans.