Micro, Small and Medium Enterprises (MSMEs) are the growth engines of India’s economy. Access to finance is crucial for the success and expansion of MSMEs. An MSME business loan can provide the necessary funding boost for these enterprises. This article explores how an MSME business loan can aid business growth.
Understanding MSME business loans
An MSME business loan is a credit facility offered by banks and other financial institutions to MSMEs. These loans help MSMEs meet their working capital requirements, invest in new machinery or technology, expand operations, and more. The loan amount from NBFCs can range from Rs. 2,00,000 to Rs. 55 lakh.
Benefits of MSME business loans
There are several advantages of availing an MSME business loan:
- Timely access to funds: The loan provides quick access to financing that MSMEs can utilise for smooth business functioning and growth. This is especially useful for seasonal businesses.
- Manage cash flows: The loan helps MSMEs manage cash flows during lean periods. The additional capital can be used to purchase inventory and pay salaries.
- Upgrade technology: The loan enables MSMEs to invest in upgrading their technology and machinery. This improves productivity and product quality.
- Expand operations: The capital can be utilised to expand manufacturing capacity, open new locations, hire more employees, and penetrate new markets.
- Low interest rates: Banks and NBFCs offer competitive interest rates and minimal processing fees on MSME loans. This ensures affordability.
- Collateral-free loans: Many NBFC lenders provide collateral-free loans up to Rs 55 lakh. This makes financing accessible to MSMEs.
- Longer tenures: MSME loans are available for longer tenures up to 96 months from NBFC lenders. The longer repayment period results in lower EMIs.
- Credit history: Timely repayment of an MSME loan helps build the credit history and credibility of the enterprise. This facilitates access to larger credits in the future at better terms.
- Tax benefits: The interest paid on the loan is tax deductible, reducing the effective loan cost. The principal can also be depreciated leading to tax savings.
- Financial discipline: The loan repayment instils financial discipline in how the enterprise manages its working capital and cash flows. This aids long-term sustainability.
- Promoter funding: The loan reduces dependence on promoter funding. This allows the promoter to utilise funds for other productive purposes.
- Professionalism: Institutional funding induces more corporate governance and financial controls. This promotes professional management.
- Low processing time: Quick loan approval due to minimal documentation requirements. Shorter turnaround times compared to traditional business loans.
- Various purposes: MSME loans can be used for a wide range of productive business purposes like purchasing equipment, working capital, business expansion, etc.
An MSME business loan provides the ideal financing avenue for small enterprises to grow and succeed. The numerous benefits coupled with easy availability make these loans a prudent funding choice for MSMEs.
MSME loan interest rates
The MSME loan interest rate is a key factor that determines the overall cost of the loan for the borrower. Interest rates start at around 9.5% per annum for loans to MSMEs from NBFCs. However, the actual interest rate depends on the applicant’s creditworthiness, type of MSME, loan amount, tenure, and lending institution’s policies. Prompt repayment can also make borrowers eligible for reduced interest rates.
MSME loan eligibility criteria
Applicants must have:
- Indian citizenship
- A CIBIL Score of 685 or higher
- Business vintage of three years or more
- Self-employed work status
- Minimum age of 24 years at the time of application
- Maximum age of 70 years at the time of loan maturity
An MSME business loan can provide the crucial financial support small enterprises need to sustain and expand their operations. Understanding the features, benefits, interest rates and eligibility criteria is important to make an informed borrowing decision. With prudent use of capital and prompt repayment, an MSME loan can accelerate business growth.
