Small and medium enterprises (SMEs) are the growth engines of India’s economy, contributing around 30% to the GDP. However, access to financing remains one of the key challenges faced by SMEs and micro enterprises looking to grow and scale up operations. This is where MSME loans can prove to be an ideal financing avenue.
What is an MSME loan?
An MSME loan is a collateral-free business loan designed specifically for micro, small, and medium enterprises. Offered by banks, NBFCs and fintech lenders, these loans provide easy access to capital for working capital needs, business expansion, upgrading machinery, or any other business requirement. The key benefits that make MSME loans the right financing choice for small businesses are:
- Easy accessibility and quick disbursal
The lengthy procedures and delays involved in securing a business loan from a bank often come in the way of small enterprises obtaining timely funds. However, with digital lending platforms and fintech companies offering MSME loans, the entire process from application to disbursal has become quick and streamlined. Within just 1-2 days, eligible enterprises can get access to loan amounts ranging from Rs. 1 lakh to Rs. 1 crore. The minimal documentation, simplified eligibility criteria, and fast processing enable rapid access to capital when you need it urgently.
- Flexible loan tenure
MSME loans come with tenure options of 1 to 5 years. So, you can choose a tenure that aligns with your repayment capability and business requirements. Longer tenure loans help keep the EMIs affordable while giving you capital for longer duration. Short term loans are suitable for bridging immediate working capital gaps. You can also get customised products like overdraft facilities and revolving lines of credit that offer flexibility.
- Collateral-free loans
MSME loans do not require any asset or property to be pledged as collateral security for the loan. This makes it possible for early-stage ventures and micro enterprises with limited assets to obtain loans solely on their business fundamentals and growth prospects. Collateral-free loans involve simpler documentation and faster processing. It also leaves you free to utilise your assets fully for growing your business.
- Retain full ownership and control
Unlike venture capital or private equity funding, MSME business loans do not require you to give up equity stake or control of your company. You retain complete ownership over your enterprise and have the freedom to make business decisions. There is no external influence or interference in your operations.
- Competitive interest rates
Digital lenders and NBFCs offer MSME loans at attractive interest rates starting from as low as 10% per annum. Their lean operations and efficient underwriting processes allow them to offer competitive rates. Prime lending rates from banks for MSMEs are also moderate in the range of 10-16%. Good credit rating can further reduce your interest rate. Government schemes like CGTMSE and interest subvention also help reduce rates.
- No prepayment charges
MSME loans come with the flexibility of prepaying the outstanding principal anytime without extra charges. This allows you to switch lenders if you find better rates or can pay off debt faster from surplus business cash flows. You can also restructure or top up your loan if required. This kind of flexibility is rarely available with term loans.
- Minimal eligibility norms
The eligibility criteria for MSME loans are minimal, making it easier for different types of enterprises to qualify. Basic criteria include being a registered business, minimum 1-3 years in operations, revenue between Rs. 5-50 lakhs, credit score over 650, and income tax returns for the business. Newer enterprises can also gain eligibility through credit enhancement mechanisms.
- Online application and account management
The entire process from loan application to documentation, approval, and disbursal can be done online through the lender’s website or app. This brings convenience and transparency. Your loan account can also be accessed 24×7 through digital channels. Repayment, downloading statements, and other services are easily managed online.
MSME loans address the key pain points faced by small businesses in securing financing for growth capital or working capital. The flexibility, ease of access, speed and customised offerings make these loans the ideal choice compared to traditional business loans. With the rise of fintech and digital lending, MSMEs now have more options and bargaining power to obtain loans that suit their unique requirements. To drive development of the MSME sector, the RBI and government have also created a supportive policy environment. For any enterprise looking to scale up and realise its vision, an MSME loan can provide that crucial push and stimulus in the most hassle-free manner.
