Interested in financial products
Processing

MSME Loan

Overview of MSME Loan

The economic and banking significance of the small and medium enterprise (SME) sector is well recognized in the overall economy. These segments in the economy face difficulties in raising finance a lot of times. This is when the MSME or SME loans come into the picture and help such businesses establish themselves with the help of finance. This segment of businesses is responsible for offering huge employment opportunities at relatively lower capital costs. It also aids in industrialisation of backward and rural areas. By contributing highly to domestic production, significantly increasing export earnings, and by being operationally flexible, SMEs play a key role in the development of the nation.

MSME refers to Micro, Small and Medium Enterprises. It is sometimes also referred to as SME, which means, Small and Medium Enterprises. MSME and SME Loans are alternatively used for loans that are offered to businesses which fall within these two categories. These loans are mostly offered to start-up owners, small business owners and even women entrepreneurs. These are offered on a short-term basis. The duration of MSME / SME loans could vary from lender to lender depending on the business’s financial requirement. As MSME loans are unsecured loans, there are certain minimum eligibility requirements which help the lender in mitigating any potential risk.

MSME loans help in meeting the funding requirements of small and medium-sized enterprises. These represent a major function of the general business finance market in which capital for different types of firms are supplied, acquired, and priced.

Features of MSME Loans in India

  • In India, both banks and non-banking financial companies (NBFCs) provide different types of loan products to small and medium enterprises (SME).
  • These loans are collateral-free, whereas others require the borrower to pledge his personal or business assets as collateral.
  • These require the borrower to pay equal monthly instalments (EMIs).
  • The new-age business loan products even enable SME owners to fund working capital needs by converting current assets into liquid assets.
  • Entrepreneurs need to understand and compare different types of SME loans in India.

Interest Rates on MSME Loans Offered by Top Banks

BankLoan Amount (in Rs.)Tenure (max in years)Interest Rates (per annum)
Allahabad Bank5 crores78.65% - 15.75%
Oriental Bank of Commerce10 lakhs-5 crores109.75% - 11.5%
Andhra Bank6 crores8 months – 10 yrs9.5% - 12.75%
Central Bank of India10,000 – 5 crores109.1% - 13.1%
Indian Bank1 Lakh109.25% - 15.1%
Punjab and Sind Bank10 crores1010.6% - 13.1%
Punjab National Bank25 crores78.65% - 13.45%
State Bank of India500 crores159.1% - 15.65%
Syndicate BankNo cap109.15% - 12.65%
UCO Bank7.5 crores78.85% - 11.7%
Union Bank of India50 crores109% - 13.75%
United Bank of IndiaNo cap510.75% - 16.25%

Different Types of MSME Loans

1. Term Loans : Term loans are one of the most mature and preferred forms of MSME loan. Some of the lending institutions offer long-term business loans to acquire fixed assets such as land, building, plant and machinery. Entrepreneurs also have the option to fund working capital needs with the help of short-term loans. The amount of loan, tenure, and interest rate of term loans differ from one lender to another. Some of the lenders charge fixed interest rate on term loans, whereas many offer floating interest rate. Each lending institution requires the borrowers to repay the term loan via EMIs. Many new-age lending institutions make use of the latest financial technologies to ensure disbursement of term loans within 48 hours.

2. Bank Guarantee : As part of MSME Loans, the entrepreneurs have an option to avail a variety of bank guarantees such as financial guarantee, advance payment guarantee, deferred payment guarantee, performance guarantee and foreign bank guarantee. The lending institutions offer bank guarantee to existing customers based on their current requirements and history of financial transactions. They also charge a certain percentage as fees for issuing bank guarantees. Some lenders may require business owners to pledge current assets or equities as collateral to avail bank guarantee. The small and medium business owners can leverage bank guarantee to assure their suppliers or customers that the contractual obligations will be met as per the terms.

3. Cash Credit Facility : The cash credit facility is offered by many lending institutions to small and medium business owners with the current assets as collateral. An entrepreneur can easily avail cash credit facility by pledging some of the current assets of the business as collateral. These can include raw materials, stock in trade, unpaid invoices, and also accounts receivable. The lending institution extends cash credit facility in the form of an overdraft. The amount of the overdraft could vary according to the value of current assets pledged by the business owner. The amount of the overdraft usually remains unchanged over a period of time. With the help of this financing facility, entrepreneurs can fund working capital needs quickly by leveraging cash credit facility as a form of revolving credit.

4. Asset-Linked Business Loans : MSMEs or SMEs tend to find it difficult to access unsecured or collateral-free credit on time. This could hamper the business. In a lot of cases, lending institutions offer credit to business owners against their personal or business assets. The amount of asset-linked business loans varies according to the market value of the assets offered by the borrower as collateral. In such cases, the borrower is required to pay interest at a lower rate as compared to unsecured business loans. Lending institutions provide asset-linked business loans to entrepreneurs against a variety of assets which could include property, gold, shares and business assets.

5. Point of Sale Finance : Entrepreneurs can avail credit facility based on the monthly sales routed through EDC (Electronic Data Capture) terminals. Today, a lot of NBFCs offer Point of sale finance to entrepreneurs in India by making use of financial technology. POS-based business loans enable business owners to avail credit based on real-time data – monthly debit and credit card sales. Entrepreneurs can even avail additional credit by encouraging customers to opt for cashless payment. A number of lending institutions even allow borrowers to repay the Point of sale finance through either fixed daily instalments or daily percentage instalments.

6. Bill/Invoice Discounting : With the help of bill discounting, also known as invoice discounting, entrepreneurs can fund working capital needs by converting current assets into liquid assets. There a number of lending institutions in India that allow business owners to avail funds by discounting bills of exchange, promissory notes, or unpaid invoices before their due date. The entrepreneur has to do away with a percentage of the principal amount as a discount. This type of financing helps them in funding working capital needs in an easier and faster way without increasing overall debt burden.

7. Construction Equipment Loan : For SME businesses which are infrastructure or construction companies, a Construction Equipment Loan is available to finance the purchase of construction equipment against hypothecation of the equipment purchased. Several banks and NBFCs finance a wide range of construction equipment which is manufactured by large reputed firms such as L & T, Komatsu, Caterpillar. A few of the popular equipment that is financed by lenders include excavators, tipper/ dumpers, transit mixers, cranes (Pick N Carry, Heavy Duty, Tower & Derrick), wheel loaders, compactors, road rollers, pavers etc.

8. Commercial Vehicles Loan : SMEs that operated as transport operators or are engaged in businesses such as logistics can explore the option of taking commercial vehicles on loan from banks. Loans are available for the purchase of commercial vehicles against hypothecation of the purchased vehicle. Loans are also available for purchasing used commercial vehicles though the terms of the loan are slightly different from that of the new commercial vehicles. Commercial Vehicle Loans are available for all types of vehicles including Light Commercial Vehicles, Medium Commercial Vehicles and Heavy Commercial Vehicles from all leading manufacturers including Tata Motors, Eicher Motors, Volvo, Mahindra Navistar, MAN, AMW, Mahindra & Mahindra, Swaraj Mazda, Bajaj Tempo, Ashok Leyland, etc.

9.Current Account with Overdraft / Working Capital Loan : Businesses which fall under the SME category can open a current account with any bank to manage the daily banking transactions. Such businesses are allowed to withdraw and deposit money from the Current Account as and when funds are available. This allows enterprises to manage their short-term working capital requirements on an ongoing basis. Banks also offer an overdraft facility on such current accounts to allow businesses to overdraw up to a certain limit and hence help them meet any short-term mismatches in their working capital finances.

MSME Loans Offered by Various Banks and NBFCs

There are several private sector banks which offer MSME loans at competitive interest rates. Mentioned below are some of the key banks and NBFCs that offer MSME loans with attractive benefits.

1.Allahabad Bank- Allahabad Bank offers seven different types of loans to micro, small, and medium-sized enterprises.

  • Allahabad Bank Laghu Udhyami Credit Card (LUCC) Scheme:

    Finance scheme for those who have availed banking facility with Allahabad Bank for the last 3 years and have a credit limit up to Rs. 10 lakhs.

  • Allahabad Bank Trade Finance Scheme:

    This loan can be taken by individuals or firms trading goods and services.

  • Allahabad Bank Finance to doctors/medical practitioners:

    This loan is to be used to finance hospital building, setting up a pathological lab, or a nursing home among others.

  • Allahabad Bank Artisan Credit Card Scheme:

    This finance scheme provides artisans with required working capital for raw materials and production process.

  • Allahabad Bank Weavers Credit Card (WCC) Scheme:

    Financial scheme for those who are involved in weaving business.

  • Allahabad Bank Revised General Credit Card (GCC) Scheme:

    To help increase credit flow for entrepreneurial activity in the non-farm sector.

  • Allahabad Bank Commercial Vehicle Finance Scheme:

    Finance scheme for traders, firms, and companies in the transport business.

2. Oriental Bank of Commerce- The Oriental Bank of Commerce offers various MSME loans for its customers. Below are some of the MSME schemes:

  • Oriental SME Development Scheme
  • Oriental SME Transport Scheme
  • Oriental SME Equipment Loan Scheme

Features of MSME Loans offered by Oriental Bank of Commerce:

  • The bank offers special loan schemes for educational institutions, hotels, restaurants, and more.
  • These loans can be opted to finance the purchase of machinery or equipment, meeting business expenses, for marketing and advertising expenses, and to purchase transport vehicles.
  • Financing amount of up to Rs. 5 crores can be availed from the bank, depending on the type of loan applied for.
  • These loans do require submission of certain assets as collateral.
  • The rate of interest offered depends on the loan amount to be borrowed and the rating for certain SME accounts, if the amount exceeds Rs. 25 lakhs.

3.Andhra Bank – Standby Term Loan

  • Andhra Bank Standby Term Loan can be used to purchase additional machinery and equipment, vehicles, and more.
  • The bank offers 20% of the fund-based limits, which is capped at Rs. 20 lakhs.
  • The maximum repayment period offered is 5 years, and the loan can be paid in either monthly or quarterly instalments.
  • Some of the other MSME schemes offered by Andhra Bank include:
    • MSME – Mitra
    • LUCC
    • TUF
    • SIDBI – TEQUP Subsidy Scheme
    • NEF
    • Term Finance
    • Non-fund-based limits
    • ACC
    • Financing to MSEs
    • Pavala Vaddi Scheme
    • AB Doctor Plus
    • AB Power Tools (Shakti)
    • CGTMSE
    • IIPP
    • ALEAP &asp; CGTSI
    • Scheme of Technology upgradation
    • Joint/Co-financing of SMEs
    • CLCSS
    • PMEGP
    • Open cash credit (OCC)
    • Composite loan scheme

4.Central Bank of India - Construction Equipment Finance Scheme

  • Central Bank of India Construction Equipment Finance Scheme can be used to purchase new equipment, machinery, and vehicles.
  • The maximum loan amount offered under this scheme is Rs. 5 crores.
  • Security for this loan is categorised into two sections—primary and collateral.
  • Primary security includes the hypothecation of the machinery, equipment, or vehicles that are financed by the bank.
  • Collateral includes submitting property, land and building, and liquid security, which helps in securing 25% of the loan amount.
  • The interest rates under this scheme depend on the loan amount sanctioned and also customer credit rating.
  • Many other MSME schemes are offered by the bank, some of which include:
    • Kalyani
    • Business Gold Loan
    • Contractor
    • General Purpose Credit Card
    • Doctor
    • Food Processing Plus
    • Mortgage – Educational Institutions
    • Trade
    • TReDS
    • Warehouse Receipt Scheme
    • Weaver Credit Card
    • Laghu Udyami Credit Card
    • Mortgage
    • Small Road Transport Operators
    • Mudra Yojana

5. Indian Bank - IND SME Secure

  • The IND SME Secure loan can be used as working capital or as a term loan to fund the purchase of machinery, construction of buildings, and more.
  • For customers who opt for the working capital scheme, the loan can be secured in the form of bill purchase, open cash credit, secured overdraft, or packing credit.
  • This scheme can be taken as a term loan or as a non-fund-based facility.
  • The hypothecation of book debts and stocks is required for working capital.
  • The hypothecation or mortgage of other assets is required for a term loan.
  • Some of the other MSME loan options under this bank include:
    • Tradewell
    • IB Contractors
    • IB My Own Shop
    • li IB Vidhya Mandir
    • IB Doctor Plus
    • IND MSME Vehicle

6. Punjab and Sind Bank - Multipurpose Business Loan / Mortgage Scheme

  • This loan scheme is designed for the requirements of small and medium business enterprises, retail traders, wholesale traders, contractors, and professionals.
  • This loan can be taken as an overdraft, cash credit, term loan, B.G., or L.C. facility.
  • Some of the other MSME loan schemes offered by the bank include:
    • Artisan Credit Card (ACC) Scheme
    • Credit Guarantee Fund Scheme for Micro &asp; Small Enterprise (CGMSE)
    • Credit Linked Capital Subsidy Scheme (CLCSS)
    • Scheme for Technology Up-gradation/Establishment/Modernization of Food Processing Industries
    • Doctor's Special
    • Laghu Udhyami Credit Card (LUCC) Scheme
    • Scheme for finance to Restaurants/Dhabas
    • Scheme for finance to brick kiln owners
    • PSB Scheme for Eating-Joints
    • PSB Scheme for Working Capital requirement for Retail Traders
    • Udyogni Scheme for Women Entrepreneurs
    • PSB SME Liquid Plus
    • PSB Vyapar Loan
    • PSB Mortgage Loan

7. Punjab National Bank (PNB Professional Scheme)

  • This scheme is available for professionally qualified individuals who require finances to enhance their business.
  • Applicants can secure two types of facilities under this scheme—term loan or overdraft if the applicant is in the service sector and term loan or cash credit if an applicant is in the manufacturing sector.
  • The scheme has two types of security covers—primary and collateral.
  • The collateral required changes depending on the amount an applicant wants to borrow.

8. State Bank of India (Simplified Small Business Loan)

  • This loan scheme is targeted at businesses who need to build up their current and fixed assets.
  • It is available for businesses in wholesale or retail trade, manufacturing, services, and also for self-employed and professional individuals.
  • Some of the other MSME loans offered by SBI include:
    • SME Smart Score
    • SME eBiz Loan
    • Stand Up India
    • Doctor Plus
    • e Dealer Finance Scheme
    • Fleet Finance
    • Export Packing Credit
    • Open term Loan
    • SME Credit Card
    • Medical Equipment Finance
    • Warehouse Receipt Finance
    • e Vendor Finance Scheme
    • ABL &asp; ABL CRE
    • PM Mudra Yojana
    • Lease Rental Discounting

9. Syndicate Bank (SyndUdyog)

  • This scheme is aimed at micro, small, and medium enterprises who are involved in the production or manufacturing of goods.
  • The margin granted under this scheme depends on the scale of business and the type of products that the financing is required for.
  • The collateral varies based on the scale of the business and the amount borrowed.
  • This scheme is available in two variants—term loan and/or working capital (fund based and non-fund based).
  • Some of the other MSME loans offered by the bank include:
    • Prime Minister's Employment Generation Programme (PMEGP)
    • SyndVyapar
    • SyndDoctor
    • SyndContractor
    • SyndUdyog
    • SyndProfessional
    • li Credit Linked Capital Subsidy Scheme (CLCSS)
    • Pradhan Mantri Mudra Yojana (PMMY) – Mudra
    • CEGSSC - Credit Enhancement Guarantee Scheme for Scheduled Castes
    • Udyami Mitra
    • Technology Upgradation Fund Scheme

10. UCO Bank (Udyog Bandhu)

  • This loan scheme extends a credit limit to enterprises involved in production, processing, preservation, or manufacturing of various goods and services.
  • Under this scheme, the interest rate for women entrepreneurs will be 0.50% lower than the effective rate of interest.
  • There are different facilities available under this scheme—term loan, composite loan, cash credit, and bank guarantee limit.
  • The rate of interest depends on the amount borrowed under this scheme.
  • Some of the other MSME loans offered by UCO bank include:
    • E-Rickshaw Under Mudra Scheme
    • Standup India
    • Scheme for Financing Two-wheeler Under Mudra
    • Laghu Udyami Credit Card
    • UCO Trader
    • UCO Udyog Bandhu
    • UCO Bunkar Rinn Yojana
    • Swarojgar Credit Card
    • Pradhan Mantri Mudra Yojana (PMMY)
    • Artisans Credit Card
    • Prime Minister's Employment Generation Programme (PMEGP)
    • UCO Doctor Scheme (Revised)
    • UCO Roop Sangam

11. Union Bank of India (Union Mudra)

  • This scheme is designed for all micro-enterprises involved in the service, trading, and manufacturing sectors.
  • It is also offered to professionals such as medical professionals, CA, CS, architects, ICWA, and more.
  • The quantum loan is dependent on the exposure of the enterprise.
  • There are two facilities available under this scheme—composite loan and term loan and/or working capital (both fund and non-fund based).
  • The rate of interest changes depending on the loan amount the business or enterprise wants to borrow.
  • Some of the other MSME loans offered by Union Bank of India include:
    • Union High Pride
    • Union Turnover Plus
    • Union GST Input Credit
    • Union Trade Plus
    • Union Start-up
    • Union Liquid Property
    • Cluster Schemes
    • Union SME Plus
    • Union Transport
    • Union Progress
    • Union Nari Shakti
    • Stand-Up India
    • Union Trade
    • Union TReDS
    • Union Procure
    • Union Supply
    • Loan Under Pradhan Mantri Mudra Yojana (PMMY)
    • Union Trade-GST
    • Union Rent

12. United Bank of India (Transport Loan)

  • The United Bank of India Transport Loan is offered for purchasing of new vehicles like auto-rickshaws, buses, vans, trucks, etc.
  • The criteria for this scheme is that these vehicles have to be manufactured by well-known manufacturers and should be sold through respective dealers for commercial purposes.
  • Applicants can get 80% to 90% of the vehicle’s cost as the loan amount. This includes chassis, registration, initial insurance, and body-building charges.
  • There are many other MSME loans offered by United Bank of India including:
    • United Mahila Udhyami Yojana
    • United Doctor Plus
    • United Medical Plus
    • United Shilpi Card
    • Artisan Credit Card
    • Swarojgar Credit Card
    • Laghu Udhyami Credit Card
    • United Udyogshree Yojana

Additional Information on MSME Loans

There are several aspects to be considered before applying for a MSME loan. Once a business has a clear understanding of the specific needs, it’ll be easier to narrow the search and get the right loan.

1. Intent of Loan: A business applying for a MSME loan must know why it is required. It could be to expand the business or invest in new machinery or for meeting working capital requirements. Once the business knows why the MSME loan is required and understands how much is the requirement along with the total cost it becomes easier to search for the right loan.

2. Eligibility: While the requirements change from lender to lender, it’s important to fulfil the criteria to avoid getting the application rejected. The lender may also ask a business to furnish certain documents for verification and understanding it’s loan needs. Interest rate matters the most while seeking an MSME loan. If a business is stuck with a high interest rate, it may have difficulty in making loan repayments on time. Also, the high interest translates into an expensive loan. Secured loans that require assets as collateral can help the business acquire a loan with low interest rates. It is important to check the fine print with the lender before finalising the loan. Some of the commonly defined eligibility criteria for MSME loans include:

  • The business must have been operational since at least 2 years
  • MSME loans are offered only to India citizens between the age of 25-55 years
  • The applicant needs to furnish the previous 2 year’s turnover records that must be authenticated by a CA
  • IT returns must have been filed for at least 1 year for the business

4. Securities: A business needs to back its loan with some sort of asset as security. MSME loans usually have two components under security—primary and collateral. Primary security is directly associated with the credit facility whereas collateral security is when the business pledges an additional asset. For example, the machinery that the business has purchased with the loan will count as primary security. The land or property that a business has pledged will be considered as collateral security.

5. Applying for MSME Loan: There are generally two ways of applying for a MSME loan. If the lender has an online facility, the applicant can fill the form with the required details and submit the application via the website. Alternatively, an applicant can also visit the nearest branch and request them for an application form. The documentation requirements can be understood from the customer care department or by visiting the official website of the bank. Some of the documentation requirements include:

  • Bank account statements of the past 6 months
  • Applicant’s passport size photograph
  • KYC statements
  • Profit and loss statements
  • Proof of business’ physical location

Frequently Asked Questions: MSME Loans

1. Do all banks offer MSME loans?

All private and public sector banks in India have mandates prescribed by the central bank for lending to the MSME sector. As per RBI guidelines, domestic scheduled commercial banks (except small finance banks and regional rural banks) and foreign banks with more than 20 branches will allocate 7.5% of their Adjusted Net Bank Credit (ANBC) or credit equivalent amount of off-balance sheet exposure, to the microenterprises sector.

2. Is it possible to get MSME loans without collateral?

As per the RBI regulations, banks are allowed to offer MSME loans up to Rs.10 lakhs without seeking any collateral. In some cases, depending on the financial position and track record of the MSME units, banks can increase this limit to Rs.25 lakhs. Hence, providing collateral depends on the extent of the loan being applied for.

3. What is meant by priority sector lending and does it include the MSME sector?

Priority Sector Lending refers to lending to sectors that impact large segments of the population, are employment-intensive, and are weaker sections. The MSME sector falls under the priority sector and hence, can avail the benefits of priority sector lending. Some of the other sectors that can enjoy priority sector lending are education, housing, agriculture, and the export sector.

4. What if I take MSME loan and do not make repayment on time?

In cases where the borrower is unable to repay the loan to the bank or credit provider, he/she is liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or on the agreed day, at 3 times the bank rate notified by the RBI.

5. If I am an MSE entrepreneur, will I receive guidance from the banks apart from the loan facility?

Yes. As an MSE entrepreneur, you can receive the following services from banks apart from MSME loans:

  • Financial literacy and consultancy support
  • Rural Self Employment Training Institutes (RSEITs)

6. Will I receive any support from the Government of India besides loans for my MSME business?

Yes. Apart from offering loans to the MSME sector, the Ministry of MSME extends support for the promotion of Information and Communication Tools (ICT), cluster development, skill development, improvement of manufacturing competitiveness, improvement of quality of products, etc. The Ministry also provides market support to the sector through the Marketing Assistance Scheme.

×Thank you! Your comment will be reviewed and posted shortly.

Write a review

CreditMantri will never ask you to make a payment anywhere outside the secure CreditMantri website. DO NOT make payment to any other bank account or wallet or divulge your bank/card details to fraudsters and imposters claiming to be operating on our behalf.