SME Finance

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What is MSME (Micro, Small and Medium Enterprises) Loan?

Published On Feb/23/2024

Like all business entities, MSMEs (Micro, Small and Medium Enterprises) also need capital to carry out their business functions. But, not all MSME owners have the required funds. So, to help such business owners, many NBFCs (non-banking financial companies) and banks offer MSME loans.

What is MSME Loan?

If you are unsure of MSME loan full form, it stands for Micro, Small and Medium Enterprises loan. It is basically a form of credit that MSME business owners or entrepreneurs can avail from any lender of their choice to meet different business-related expenses and carry out day-to-day operations.

MSME Definition

In May 2020, the government of India altered the MSME definition. And the new definition is now uniform for MSMEs in the manufacturing and service sectors. Also, earlier, the MSMEs were categorised based on investment only. But, now the MSMEs are defined based on both the capital invested and the annual turnover.

The limit for the manufacturing and service sector has now increased, which means more business enterprises can avail of the benefit of MSME loan.

As per the RBI (Reserve Bank of India) guidelines, these loans are meant for only certain business entities that fall under the following categories:

Company size
(it could be a manufacturing unit or service provider)
Investment Limit
1 crore or less
10 crore or less
20 crore or less
Maximum annual turnover
Up to 5 crore
Up to 50 crore
Up to 100 crore

Depending on the category you fall under, you can avail of the MSME loan and get the amount credited to your current account after approval.

Now that you know the definition and MSME loan meaning, let us know about the eligibility, features and benefits and the purposes for which you can use the credit.

MSME loan usage

As an MSME owner, you can use the loan to meet your business expenses. It could be -

  • buying a piece of new machinery to increase production or make the process more efficient

  • purchasing or stocking raw material

  • increasing working capital

  • maintaining sufficient cash flow

  • setting a new arm of the existing business

  • procurement of fixed assets, business tools, vehicles, etc.,

  • paying employees’ salaries or rent for the premises occupied

  • settling existing debts to the suppliers/vendors, etc

  • any other operation purposes as you deem necessary

Features and benefits of business MSME loan

  • Availing a MSME loan allows you to maintain a good credit flow in your business and the MSME sector in general.

  • With an MSME loan, you can accomplish your goals and set a new benchmark for your business.

  • These loans enable you to upgrade the technology in your business, and increase production or provide better services to your customers.

  • Business loans for MSME allow you to grow in your business and be more competitive in the industry.

  • These loans are available for all kinds of MSME businesses. It can be a sole proprietorship firm, partnership company, private or public limited company, etc. Also, service-based and manufacturing MSME are eligible to avail this loan, except for educational institutes, self-help groups, and retail traders.

  • You can apply for an MSME loan online and get instant approval. Also, minimum paperwork is involved, and you need not visit the branch for anything.

  • You can get the MSME loan for business without offering any collateral or security, i.e., you need not pledge any asset to the lender against the amount you borrow.

MSME Loan Interest Rate

One of the critical aspects you must consider while availing an MSME loan is the interest rate as it has a direct impact on the repayment capacity. The lender decides the interest rate on the MSME loan based on different factors like –

  • Your business credibility and the vintage

  • The amount you wish to borrow

  • The repayment period you choose

  • Your credit score

  • Specific lender guidelines

If you have been running a business successfully for a few years, and your entity has a reputation in the market, chances are high that you would get your loan approved faster without any hassles. Similarly, if you have a high credit score, it reflects your creditworthiness and the lender will be assured of recovering the amount.

The amount you borrow and the repayment period you choose also has an impact on the interest rate. If you borrow a high amount, you may have to pay a higher interest.

However, all lenders in India offer MSME loans at competitive interest rates so that the business owners do not face a repayment burden.

Collateral for getting MSME loan.

When you apply for an MSME with NBFC like Aditya Birla Capital, you need not provide any collateral, enabling you to get the funds without the risk of losing any asset.

Documents required for MSME Loan

One of the significant reasons why small business owners prefer applying for an MSME loans is that they don’t require complex paper. With Aditya Birla Capital, you have to provide only a few basic documents, including –

  • PAN (permanent account number) Card

  • Aadhaar card

  • Current account statement for the last one year

  • Business proof showcasing your business exists for at least one year

To Conclude

MSME loan is a big boon for all micro, small and medium enterprise owners. It allows them to get the funds for all business needs without any hassles. The simple application process, quick disbursal time, and minimal documentation make it a go-to financing option for all.