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Most Indian public and private banks offer credit facilities to MSMEs who need financial support to establish or expand their business. Furthermore, the Indian government has launched protocols to finance micro, small and medium enterprises.

These initiatives have been instrumental in ensuring the survival of some sectors that have struggled during COVID-19. Keep reading to know what MSMEs are, eligibility criteria to apply for a MSME loan and the application process.

What is an MSME

Micro, small and medium-sized enterprises include enterprises that involve production and enterprises that are service-oriented and simultaneously satisfy all the criteria mentioned below:

Micro sector Investment is less than Rs. 1 Crore

Annual turnover is less than Rs. 5 Crores

small sector Investment is less than Rs. 10 Crores

Annual turnover is less than Rs. 50 Crores

medium sector Investment is less than Rs. 50 Crores

Annual turnover is less than Rs. 250 Crores

To note: The investment value includes the budget allocated for the purchase of capital goods, manufacturing plants and other operating expenses.

What are the eligibility criteria to apply for an MSME loan

The credit institutions decide on the eligibility criteria; therefore, they vary for a particular bank or NBFC. Additionally, the credentials differ significantly depending on the duration and applicability of a specific scheme.

Please refer to the following table for a general idea of ​​eligibility.

Type of company Criteria
Service sector The investment should be less than Rs. 10 Lakhs for micro industries.

For small and medium sectors, the investment should not exceed Rs. 2 Crores and Rs. 5 Crores, respectively.

Manufacturing sector For micro-sectors, the investment cannot exceed more than Rs. 25,000,000.

Small sectors cannot attract investments above Rs. 5 crores while the upper investment limit for medium sectors is Rs. 10 Crores.

What documents are required for MSME loan application

Your preferred bank or NBFC will provide a list of documents that must be presented when applying for a loan. However, we have provided the required papers, which a borrower should keep handy regardless of the scheme.

Purpose of verification Documents to submit
Identity proof Aadhaar Card, PAN Card, Voter ID Card, Passport
Residential evidence Utility bills, rental contracts or ration card
Registered business address Utility bills, lease agreement, rental agreement
Income Details Copies of the balance sheet for the previous two years
Tax file PAN card, computer declarations, sales tax declarations
Proof of security deposit Photocopies of deeds (title deeds and leases)
Additional documents Project specific report (if applicable)

How to Apply for an MSME Loan

The application process is easy to follow as the user interface is simplified. First, you need to check if your preferred lender has offered you the option to apply online. If the answer is yes, go to the application form, carefully fill in the details and follow the instructions to understand the submission process. Most lenders require the borrower to submit a hard copy of the application form to the nearest authorized office of the business. The advantage of doing so is that the loan seeker can clarify any matter related to the scheme with the appointed officials.

Are MSME loans secured or unsecured?

Most MSME lenders do not require the borrower to pledge anything of value. Thus generally, this credit instrument is not guaranteed. However, if you are asked to submit guarantees in special circumstances, we suggest that you contact the legal advisers before signing the agreement.

What are the government initiatives to promote the MSME sector

The Indian government has launched several loan programs to promote start-up businesses and create job opportunities. Many loan options are unsecured and applicants get immediate approval. Three of the most popular diets have been discussed below:

These loans fall under the broader Pradhan Mantri Mudra Yojana program and are intended to financially support businesses that are not involved in business or agriculture. The upper limit of the loan amount is Rs. 10,000,000.

Also, based on the stage of business growth, this program has been categorized into three distinct phases that determine the maximum loan amount that can be approved.

PMMY program name Loan amount (upper limit) Commercial phase
Shishu Rs.50,000 First stage of a business
Kishor Rs. 50,000 – Rupees. 5,000,000 Mid-term (money needed to support a business)
Tarun Rs. 5 Lakhs – Rs. 10,000,000 Expansion phase (purchase of a new manufacturing plant/investment in capital equipment)
  • Prime Minister’s Job Creation Program (PMEGP)

This loan program aims to motivate young Indians to set up new businesses to consolidate their economic status. The PMEGP scheme is closely associated with a separate central scheme known as Pradhan Mantri Rojgar Yojana.

  • Credit Guarantee Fund Trust for Medium and Small Enterprises (CGTMSE)

Micro and small business owners who have been in business for a while and enthusiastic new salespeople can apply for this program. A maximum of Rs. 1 Crore loan amount can be sanctioned under this plan, the best part being that it is an unsecured loan.

What are the top lenders offering loans to MSMEs in 2022

To summarize a plan, before applying for an MSME business loan, you need to get an idea of ​​the sme loan interest rates levied by different credit issuers.

Lender Interest rate (per year)
Bajaj Finance 18% and more
CreditBee 15% and more
lendingkart 14% and more
NeoGrowth 18% and more
FlexiLoans 12% and more

*To note: Interest rates may vary depending on several factors such as credit rating, income, age of the business owner when applying for the loan, etc.

What to make sure before applying for an MSME loan

There are certain conditions you need to meet for seamless loan processing.

  • Your CIBIL score must be above 750
  • All required documents should be kept close at hand
  • It is suggested not to approach multiple lenders as it may affect your credit score
  • Lenders that charge upfront fees should be avoided as there is a high chance that they are fraudulent

Owners of small and medium-sized businesses often face situations where they feel that insufficient cash flow is hampering their growth prospects. Therefore, they should complete their GST registration process to avoid such a crisis. Eventually, they will be entitled to several flexible MSME loan schemes in terms of repayment duration, creating a favorable scenario for business expansion.

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