What is an MSME Loan & how does it work?

MSME stands for Micro, Small and Medium Enterprises. The meaning of MSME Loans is the loan given to small-scale businesses or start-ups to establish their business or to expand it further. In India, the future of economic growth is heavily dependent on the lakhs of small and medium-scale businesses trying to thrive in a very competitive market. Read on to know how an MSME Loan can do wonders for them.

What is an MSME loan?

MSME Loans are specifically designed to meet the funding needs of businesses in the MSME sector. Various financial institutions, such as banks, non-banking financial companies (NBFCs) and government agencies, offer MSME Loans.

The MSME sector is classified based on the following parameters -

How is an MSME Loan used?

The meaning of MSME Loans can be described by their utilisation for various purposes, such as

• Working capital - MSMEs often require funds to manage working capital, which includes funds for day-to-day operations, inventory purchasing, salaries, etc.
• Business expansion - It covers expenses required to expand operations to enter new markets, introduce new product lines or scale up existing infrastructure.
• Technology upgradation - Individuals or businesses can utilise loans to invest in upgrading technology, implementing automation solutions and adopting digital platforms.
• Export financing - Export financing facilities, such as pre-shipment and post-shipment finance, are helpful for MSMEs engaged in international trade.

Features of MSME Loans

• The aim of MSME loans is to provide funds to meet the urgent financial needs of businesses.
• They require minimal documentation compared to larger commercial loans.
• MSME Loans have a lower rate of interest and fees.
• Some MSME Loan schemes offer collateral-free financing, particularly for small and micro enterprises that may lack significant assets to pledge as security.
• There is strong support from the government, like the Credit Guarantee Scheme and the interest subvention schemes for MSMEs.

A few examples of MSME Loan schemes

1. Pradhan Mantri Mudra Yojana (PMMY)

PMMY is a flagship initiative by the Government of India to provide financial assistance to micro enterprises nationwide. It divides these loans into three categories based on loan amounts - Shishu (up to ₹50,000), Kishor (₹50,001 to ₹5,00,000) and Tarun (₹5,00,001 to ₹10,00,000).

2. Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE)

This scheme provides a credit guarantee to lending institutions against loans extended to MSEs, thereby encouraging banks and financial institutions to extend financial support to this vital sector and reduce their risk.

Collateral for MSME Loans

MSME Loans have a guarantee covered by the CGTMSE. However, the extent of guarantee coverage varies depending on the borrower category and the loan amount. You may have to give no collateral or limited collateral for the loan. However, the lender will put the first charge on all the assets created from the loan amount.

Axis Bank offers zero-collateral loans of up to ₹2 crore exclusively for MSMEs. It covers various types of credit facilities like trade, working capital and term loans. The CGTMSE secures the facilities in this loan product.

Documents required for MSME Loans

• Application form
• Latest 12 months' bank statement
• KYC documents like PAN and Aadhaar
• Latest ITR and financial statements
• Business registration certificate

As per the bank's policy, you will have to provide other additional documents if requested.

Also Read:Get the funds you need with an MSME Business Loan

Conclusion

Understanding MSME and its categorisation is the first step towards a comprehensive learning about the loans for this sector. MSME Loans offer attractive features like flexible collateral, high loan amounts, minimal documentation, and competitive interest rates. Boost your business with an Axis Bank MSME Samriddhi Loan at competitive interest rates!

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.