MSME / SME Loan

An MSME loan or an SME loan is a credit facility extended by banks, small finance banks, and non-bank finance companies such as IIFL Finance to micro, small, and medium enterprises.

MSME loans are either unsecured or secured loans given by financial institutions to meet various expenses to businesses as well as individuals, sole proprietors and partnership firms. Startups are also eligible for MSME loans.

These loans can be availed for a wide range of purposes, including for investments in plant and machinery, buying inventory, and making payments to staff or vendors.

Features of MSME Loan

MSMEs play an important role in India’s economic growth, especially in the context of employment generation. The government has launched a number of schemes to ensure timely and cheaper credit is made available to these units. Banks and NBFCs have designed flexible MSME loan products. Here are some key features of MSME loans:

  1. Loan amount: MSME loans can be of varying amounts depending on the requirement of businesses. Most banks and NBFCs provide loans starting from Rs 50,000. The loans can go up to Rs 10 crore or even higher.

  2. No collateral: Lenders do not seek any collateral for unsecured MSME loans, and hence small business owners don’t have to worry about providing any security. Secured loans, however, do require a collateral.

  3. Interest rate: The MSME loan interest rate depends on the lending institution and the nature of the business of the applicant.

  4. Flexible repayment: Banks and non-bank finance companies provide flexible repayment options for the repayment of MSME loans. The tenure is designed based on the cash flows and other receivables. Usually, the tenure ranges from one to five years but it can be mutually decided by the lender and borrowers. There is also an option for part-prepayment.

  5. Digital application: The MSME loan can be applied for online, cutting down on the hassle of paperwork, which often results in delays in availing loans. Most lenders provide an end-to-end digital application process.

  6. Approval process: Once all the documents are submitted, lenders undertake a verification exercise. Post that, the MSME loan amount is disbursed within three-four days of the application.

  7. Processing fees: Borrowers may have to pay charges such as processing fees, which usually range between 2-3% of the loan amount. There are no other hidden charges levied on borrowers.

MSME/SME Loan EMI Calculator

Calculate your EMI and choose the most suitable product for you

Benefits ofMSME Loan / SME Loan by IIFL Finance

Lenders like IIFL Finance offer MSME loans for a variety of purposes keeping in mind that small businesses benefit from taking such loans. Here are some benefits of an MSME loan scheme by IIFL Finance.

Faster Approval

Timely availability of credit is crucial for businesses, especially for SMEs. IIFL Finance ensures that the application for an MSME loan scheme is verified as soon as possible and money is disbursed within days and not weeks. Technological innovation has made this possible. Hence, availing credit from IIFL Finance can help MSMEs quickly meet the requirements of the business.

Retaining Control

Smaller MSME loans are unsecured in nature, and lending institutions such as IIFL Finance do not claim any charge on the company’s assets. This is especially useful for smaller businesses as they remain in control of their business and its assets.

Transparency

IIFL Finance promises a completely transparent loan approval process and explains all the costs to borrowers upfront. This helps MSMEs to better manage their cash flows and they are not burdened with any hidden charges.

Usage of Funds

An SME loan is given based on the business plans submitted by applicants. As long as the money is spent for the purpose of business, there is no restriction on when and how the money can be used.

Easy Repayment

In addition to designing flexible EMIs and repayment tenures, IIFL Finance also provides partial or early repayment options to help borrowers clear their debts easily.

Improving Credit Score

Availing an SME loan from financial institutions like banks and NBFCs itself can improve the creditworthiness of applicants if they make timely repayments. This makes the applicant eligible for a larger loan under an MSME loan scheme in the future with the power to bargain on the interest rate.

MSME / SME Loans Fees & Interest Rates

Banks and NBFCs offer a wide range for the MSME loan interest rate. The actual MSME loan interest rate is arrived at by considering various factors such as the amount of loan, the type of business of the applicant, projected revenues, and tenure of the loan, etc.

Eligibility Criteria for MSME Loan

  1. Nationality: Only Indian nationals can apply for MSME loans.

  2. Age: The minimum age of the applicant must be of 23 years and maximum age of 65 years (at the end of loan tenure)

  3. Business Vintage: Lenders keep a minimum number that business should be in existence to be eligible for MSME loan apply. This also depends on the amount of loan. Usually, a minimum of 6 months of business vintage is required.

  4. Nature of Business: The business for which the loan is taken should be legally allowed as per existing laws. Applicants with blacklisted business will not be eligible for availing loans.

  5. Documents: Borrowers seeking to complete the MSME loan apply process need to furnish documents such as PAN Card, proof of business ownership, bank statement, and past payment history. For instance, in addition to the KYC documents, IIFL Finance requires at least 12 months of bank statements of the main operative bank account to review the application.

  6. Credit Score: A decent credit score helps in faster verification of SME loan at an attractive rate.

Documents Required for MSME / SME Loans

Documentation required to seek an MSME loan for new business varies depending on the applicant, whether proprietorship, partnership or private or one-person company. But some of the common documents are as follows:

Bank Statement

Usually, 12 months of bank statements of the main business account

Business Registration

Business registration proof in the form of business registration certificate or GST filing

Documents

PAN Card and Aadhaar number copy of proprietors

Partnership

A partnership deed is required in case the business is in partnership. Similarly, a company PAN card is needed in case of a private limited company or an LLP.

Purpose of MSME Loan

Due to a lack of easy access to finance, the growth of small businesses is often restricted. An MSME loan for new business, hence, can help entrepreneurs grow their operations multifold by helping them in a variety of ways.

  1. Purchasing assets such as plant and machinery or any particular hard assets that are core to the business.

  2. Buying pre-owned or new fleet of vehicles and acquiring commercial property to expand existing business.

  3. An MSME loan for new business can especially be helpful in plugging cash flow mismatch by opting for working capital loans to meet expenses such as salaries, stocking up inventories, etc.

  4. Launching a new range of products as well as diversifying in newer geographies.

  5. As part of the growth initiative, a part of the MSME business loan can be used on marketing and advertising that will help small businesses to reach to wider set of audience.

How to Calculate MSME / SME Loans EMI?

The monthly loan installment or EMIs consists both of principal as well as MSME loan interest. Lenders like IIFL Finance provide a flexible repayment schedule. The EMI amount is based on the loan amount, cash flow of the underlying business, duration and the MSME loan interest rate. Small businesses seeing improvement in revenue and free cash flow, can opt for partial prepayment and clear their debt obligation. This can help in getting additional loans for business expansion. Most financial institutions provide a simple and easy-to-use online calculator for borrowers to understand their repayment through EMIs as how much MSME loan interest rate they are paying.

The formula to calculate EMI and MSME loan interest rate is:

P * r * (1+r) ^n / ((1+r) ^n-1).

P is the principal amount, R is the rate of interest per month, N is the loan tenure of MSME loan.

Let’s say that you want to take a business loan of Rs 45 lakh (P), with an interest rate (r) of 18% and a loan tenure (n) of 5 years. Knowing these factors, you can calculate the MSME business loan interest rate by putting the figures in the above formula:

business loan formulaarrow

EMI = 45,00,000 x 18%/12 x (1+18%/12)^5/((1+18%/12)^5-1)
EMI = Rs 1,14,270

Total Interest = Rs 23,56,225, which in percentage terms refers to 34% of the total repayment value of the loan.

Factors affecting MSME Loan Interest Rates

The MSME loan interest rate varies from lender to lender. Here are the factors that affect the interest rate:

  1. Amount and tenure of repayment are the most common factor that influence MSME loan interest rate.

  2. Credit history, credit score of the applicant as well as the repayment capacity.

  3. Business vintage and profitability track record.

  4. Nature of underlying business and potential on growth, cash flow and revenue also influence the MSME loan interest rate.

  5. MSME loan interest rate is usually high if the loan is unsecured in nature but some of these loans are backed by government guarantee giving comfort to lenders. This, in turn, can help lower interest rates.

Do's and Don'ts when applying for an MSME Loan Online

While lenders like IIFL Finance have made it easier for businesses seeking to take MSME loan apply online, applicants must follow a few steps to ensure their applications are approved timely and without hassles.

Do’s

Loan Amount: Assess your loan requirement on the basis of the business plan and potential as well as timeline for revenue generation. This will help in narrowing the required amount and ensure there is no overestimation.

Check Credit Score: Most lenders rely on the credit score of the borrowers to verify the loan application. It is a good idea to check the score before starting the MSME loan apply online process. A better credit score will help in negotiating a lower interest rate and accordingly application can be made with the selected lender.

Documentation: Keeping all the documents ready before taking an MSME loan apply online will make the process faster. Making a check list of all required documents by banks and non-bank finance companies like IIFL Finance will ensure verification is done as quickly as possible.

Business Plan: While lenders give MSME business with flexibility to borrowers on usage of funds on business, it is a good idea to keep handy the details of how money is planned to be used.

Don’ts

Multiple Applications: Do not apply for MSME loans with multiple lenders because it will severely impact your credit score. A poor score can lead to rejection of a loan application or the borrower may have to pay a higher rate of interest. Both these cases can come in the way of the growth of MSMEs.

Payments: n case, borrowers do not adhere to repayment schedule on current debt, it can directly affect the credit score as well as put additional burden in the form of penal charges. In addition, poor repayment track record could lead to a negative impact on the business.

Fine Print: While lenders take efforts in making borrowers understand all the terms and conditions, applicants must take time out and read all the details, especially those related to interest rate and penal charges.

Fake Websites: In recent years many digital lending apps and websites have mushroomed that allow people seeking to take MSME loan apply easily. Borrowers must double check that the application is made with a genuine lender. One of the few things to keep in mind is that formal financial institutions like banks and NBFCs never ask for any upfront payment even before application is made. If any lender asks for such upfront payment while applying, the applications must not be made with that particular website.

FAQs

The MSME loan interest rate differs from lender to lender. While banks charge lower rates compared to NBFCs, the application is processed faster by NBFCs. The current rate of interest starts from 12.75% - 44% per annum.

Was this helpful?

Yes, it is. A higher score increases the probability of loan approval. Moreover, applicants of MSME loans with a good credit score of 750 and above benefit from faster processing of their application as well as lower interest rate.

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One can get this type of loan by making an application with banks or NBFCs for unsecured business loans.

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This limit is set by each lender and hence the minimum turnover limit varies.

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Yes. It is compulsory to provide the previous year’s GST returns for MSME who come under this tax bracket.

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Technically, there is no difference. SMEs are part of larger MSME universe. The difference could be based on the availability of loan amount.

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By paying applicable processing fee, one can renew MSME loan.

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