What is MSME Loan? Your Ultimate Guide to Business Financing in India

Did you know that India's MSME sector contributes nearly 30% to the national GDP and accounts for almost 45% of the country’s total exports? Despite this significant role, many Micro, Small, and Medium Enterprises (MSMEs) face challenges in securing adequate funding. This is where MSME loans step in, offering the financial support needed to fuel business growth, manage cash flow, and expand operations.

If you're a small business owner looking for ways to fund your venture, an MSME loan might be just what you need. In this guide, we’ll cover everything from the basics of MSME loans to their features, benefits, types, and frequently asked questions, helping you make an informed decision.

What is an MSME Loan?

An MSME loan is a financial product designed specifically for Micro, Small, and Medium Enterprises (MSMEs). These loans provide the necessary capital for businesses to expand operations, invest in equipment, manage cash flow, or meet working capital needs. Any business having an investment limit of ₹1 crore and turnover limit of ₹5 crore is categorised as a micro business. Small businesses have investment limit of ₹10 crore and turnover limit of ₹50 crore. Whereas, large enterprises have an investment limit of ₹50 crore and turnover limit of ₹250 crore.

In India, MSME loans are offered by a variety of lenders, including banks, Non-Banking Financial Companies (NBFCs), and fintech platforms. These loans are tailored to meet the diverse requirements of small business owners and can be availed with or without collateral.

Features of MSME Loans

MSME loans come with a range of features that make them a preferred choice for small business owners:

1. Flexible Loan Amounts: You can avail of a loan amount starting from ₹3 lakh to ₹1 crore or more. 
2. Competitive Interest Rates: The interest rates for MSME loans are generally lower compared to other types of business loans. With Ujjivan SME, you can secure Secure Enterprise Loan with interest rates starting from only 14% p.a.
3. Quick Approval and Disbursal: Banks have streamlined the application process, ensuring faster approvals, often within 2-7 days.
4. Flexible Repayment Tenure: You can choose a repayment period that suits your cash flow, typically ranging from 12 months to 10 years.
5. Minimal Documentation: Most lenders require basic documents like business proof, bank statements, and financial reports, making the process hassle-free.

Benefits of MSME Loans

MSME loans offer numerous benefits that can help you take your business to the next level:

1. Boosts Business Growth: With an MSME loan, you can fund new projects, expand your operations, or enter new markets without financial strain.
2. Enhances Cash Flow: These loans help you manage short-term cash flow needs, ensuring smooth business operations.
3. Supports Innovation: MSME loans enable you to invest in new technologies, machinery, or product development, giving you a competitive edge.
4. Potential Tax Benefits: The interest paid on MSME loans may be eligible for tax deductions, reducing your overall tax burden.
5. Government Support: Many MSME loans are linked with government schemes like Mudra Loans, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), and Stand-Up India, which offer additional benefits like interest subsidies.

Types of Government-backed MSME Loan Schemes

1. CGTMSE Term Loan

CGTMSE stands for Credit Guarantee Fund Trust for Micro and Small Enterprises. The scheme offers collateral-free loans to Micro and Small enterprises. Here are some of the features of CGMTSE Term Loan.

• Loan amount up to ₹2 crore
• Flexible repayment tenure up to 10 years
• Lower interest rates starting at 13% p.a.
• No collateral required

2. ECLGS

ECLGS stands for Emergency Credit Line Guarantee Scheme. In the wake of COVID 19, the Government of India unveiled a ₹20 Lakh Crore comprehensive package, known as the Emergency Credit Line Guarantee Scheme (ECLGS). However, the scheme was available only up to 30 June 2021. Some of the features of this scheme include:

• Purpose was to aid MSME sector for working capital and operational needs
• Borrowers with up to ₹25 Crore outstanding as on Feb 29, 2020 and up to ₹100 Crore annual turnover for FY 2020 are eligible for this scheme
• 20% of the total outstanding credit of borrowers can be sanctioned as a loan under the Guaranteed Emergency Credit Line (GECL), for those who having a loan as on Feb 29, 2020.
• Zero processing charge
• No collateral required

3. Pradhan Mantri Mudra Yojana (PMMY)

Pradhan Mantri Mudra Yojana or PMMY is a Government of India initiative to provide financial support to micro businesses across the nation. The loans are divided into three categories – Shishu (up to ₹50,000), Kishor (₹50,001 to ₹5 lakh) and Tarun (5,00,001 to ₹10 lakh).

4. Prime Minister’s Employment Generation Programme (PMEGP)

Prime Minister’s Employment Generation Programme (PMEGP) is a credit-linked subsidy scheme. The programme is managed by the Ministry of Micro, Small and Medium Enterprises. The scheme came into fruition after the merger of PM Rojgar Yojana (PMRY) and Rural Employment Guarantee Programme (REGP) in 2008. The programme aims to generate over 40 lakh long-term employment possibilities. Some of the key features include:

• The maximum cost of a unit or project under this scheme is ₹50 lakh in the manufacturing sector. For business or service sector, it’s ₹20 lakh.
• As per mandate, the beneficiary has to contribute 10% in the case of general category applicants. 
• The PMEGP subsidy provided is 15% in urban areas and 25% in rural areas. 
• The capital expenditure and one cycle of working capital can be included in the project cost. 
• Land cost cannot be a part of the project cost.

5. AIF

AIF stands for Agriculture Infrastructure Fund Scheme. The Government aims to improve the efficiency of the agriculture sector through this scheme. Some of the key features of this scheme are:

• Aims to reduce national food wastage percentage
• Aims to improve post-harvest management infra
• Aims to increase private investments in the agriculture sector

Other MSME Loan Schemes Offered by Ujjivan Small Finance Bank

Ujjivan Small Finance Bank offers a wide range of MSME loan schemes tailored for your unique business requirements.

1. Secure Business Loan

• Loan amount up to ₹25 lakh
• Repayment tenure up to 10 years
• Competitive interest rates

2. Secure Enterprise Loan

• Loans up to ₹1 crore
• Repayment tenure from 3 years to 10 years
• Competitive interest rates

3. Business Edge Term Loan

• Loans up to 10 crore
• Repayment tenure up to 10 years
• Competitive interest rates

4. Loan Against Rent Receivable

• Loans up to ₹2 crore
• Repayment tenure up to 7 years
• Interest rates starting from 14% p.a.

5. Prime LAP Semi-Formal

• Loans up to ₹1.5 crore
• Tenure up to 144 months
• Interest rates starting from 12% p.a.

Types of MSME Loans Based on Purpose

There are various types of MSME loans available, catering to different business needs:

1. Working Capital Loan: Provides funds for day-to-day business expenses such as inventory purchases, payroll, and utility payments.
2. Term Loan: Ideal for long-term investments in assets like machinery, property, or technology upgrades.
3. Machinery Loan: Specifically designed to help you buy or upgrade machinery and equipment.
4. Mudra Loan: A government-backed loan scheme offering financial support up to ₹10 lakhs to small businesses and startups.
5. Invoice Financing: Helps improve cash flow by providing funds against unpaid invoices.
6. Overdraft Facility: Offers a flexible credit line based on your business’s financial health, allowing you to withdraw funds as needed.

How to Apply for an MSME Loan

Applying for an MSME loan is simpler than ever, thanks to digitization. Here’s a step-by-step guide:

1. Check Eligibility: Ensure your business meets the basic eligibility criteria, such as being a registered MSME, having a minimum business vintage (1-3 years), and meeting the required turnover and credit score.
2. Gather Necessary Documents: Prepare essential documents like business registration proof, financial statements, bank statements, and GST returns.
3. Choose a Lender: Compare loan options from banks, NBFCs, and online lenders based on interest rates, loan amount, and repayment terms.
4. Submit the Application: You can apply online or offline by filling out the application form and uploading the required documents.
5. Await Approval: If your application meets the lender’s requirements, you can expect approval within a few days.