If you own a small business and wish to obtain short-term financial aid, you must consider getting an loan to do the same. These loans do not require you to pledge any collateral, can be accessed via a completely online process by banks like YES BANK, and are affordable loans since they charge lower interest rates.
What is an MSME loan and how does it work?
The acronym “MSME” stands for ‘Micro, Small, and Medium Enterprises’. MSME loans are loans lent by banks to these enterprises and are meant to meet various business-related requirements, such as carrying out daily operations or purchasing new equipment. To understand how loans work, you should know the new definition of MSMEs as defined by the government of India in May 2020. As per the Reserve Bank of India (RBI), MSMEs are companies that fall under the following categories:
Key Features
- Loan amounts range from ₹50,000 to ₹5 crore (or up to ₹20 lakh under PMMY Mudra Yojana), covering working capital, machinery, or term loans.
- Many are collateral-free with credit guarantees up to 85-90% for micro-enterprises.
- Tenure spans 1-15 years; processing can be as fast as 59 minutes for eligible applicants.
Features and benefits of MSME loans:
Here are the important features and benefits of availing an MSME loan:
- Loans help you meet pressing, short-term financial goals.
- You can apply for MSME loans as a sole proprietorship firm, a partnership company, a private or public limited company, etc.
- Service-based and manufacturing MSMEs, too, can avail loans.
- You can get an MSME loan without pledging any collateral with the bank.
MSME loans help owners of MSMEs fulfil short-term financial goals. To apply for any bank’s MSME loan, you must meet the bank’s age-related criteria and own a new/existing MSME. You can also apply for digital loans like YES BANK’s loans without visiting a bank branch multiple times to manage your loan or apply for it.
What are the types of MSME business loans?
Several types of MSME loans are available to meet your business needs.
- Working Capital Loans: These loans are useful for businesses that need funds to run their day-to-day operations.
- Cash Credit Loans: A cash credit loan is a flexible facility where you receive the loan amount as needed to run your business.
- Short-Term Unsecured Loans: This loan helps in resolving sudden financial problems without pledging any assets. Due to quick approval and short repayment tenure, it is suitable for meeting immediate financial needs.
- Letter of Credit: Businesses engaged in international trade sometimes require a Letter of Credit to facilitate transactions.
- Term Loans: This loan is suitable for expanding your business in the future or purchasing equipment, and it needs to be repaid within a fixed timeframe.
- Loan Against Property: In a loan against property, you can obtain a larger loan amount by pledging an asset, such as land.
- Equipment Financing: As the name suggests, equipment financing loans can be used to purchase machinery, vehicles, or other equipment.
Who Can Apply for an MSME Loan?
Eligibility for an MSME loan generally includes:
- You must be running a registered MSME business.
- Your business must fall under the Micro, Small, or Medium category as per government classification (based on investment and turnover).
- You must have a good credit history and financial documents to prove business stability.
- Both new and existing businesses can apply, provided they meet the criteria.
- These loans are ideal for businesses looking for larger amounts or planning long-term investments.
Who Is Eligible for a Mudra Loan?
Mudra loans are meant for:
- Micro-enterprises, such as small traders, shopkeepers, artisans, tailors, food vendors, and other informal businesses.
- Startups or individuals looking to begin a business with a small capital requirement.
- You do not need to register your business formally in most cases.
- The loan amount required should be within ₹10 lakh.
Conclusion
An MSME loan is not just a financial transaction; it is a means to strengthen the foundation of your business. If your plan is clear and your intentions are honest, a lack of funds cannot stop your business today. Register your enterprise, maintain proper records, and take full advantage of these government schemes.
Your small step today could be the beginning of tomorrow’s “unicorn” or a major industry.
