As a start-up, businesses have two main goals: the continuity of their business and growing/expanding the venture to new frontiers. But any sort of upheaval of your current business structure or processes may require a significant amount of money. As a start-up, you may not be able to afford that sum.
So what do you do?
This is where business loans and MSME (Micro, Medium & Small Enterprises) loans come in handy. Both these loans are well-suited for medium and small-term businesses looking for expansion. From working capital to maintenance of plants and machinery and even managing cash flow, businesses require loans for many reasons.
We will further break down both these kinds of loans to help you understand which one your business may require.
What are business loans?
Established enterprises that may need financing can avail business loans from banks or Non-Banking Financial Institutions (NBFC).
Business loans are disbursed for new product launches, business growth, enhancing production capabilities, hiring staff and renting or buying a warehouse or property. Business loan is a short-term loan that can help businesses meet the aforementioned needs and improve credit history with timely repayments.
What are MSME Loans?
MSME stands for Micro, Medium and Small Enterprises. As the name suggests, MSME loans are for micro to medium enterprises looking for expansion, fund their day-to-day operations, buying new equipment, inventory management and managing cash flow. These loans have quite a wide scope and can also be used for hiring, marketing and legal purposes.
What are the key differences between Business Loans and MSME Loans?
Business loans and MSME Loans can be differentiated along a number of factors.
The key differences between the two types of loans are:
- Loan Amount
The amount of money disbursed as a business loan generally ranges upwards from Rs. 20 Lakh to a few crores.
MSME loans, on the other hand, range between Rs. 1-20 lakhs.
As one can see, SME loans are a viable option for start-ups and medium sized businesses up to 5 years old. However, once your business starts to gain traction and goes bullish on the growth charts, business loans are more suited due to their higher loan amount.
- Rate of interest
MSME loans have high rates of interest due to the collateral-free high risk involved. On the other hand, Business loans have a much lower rate of interest.
- Disbursement time
Business loans involve a high amount, and therefore have strict formalities and a long documentation process, along with in-person presence during various stages of the loan application.
MSME loans are an initiative by the government to encourage businesses with a quick documentation process and loan approval within 2 days of application.
MSME loans require minimum documentations as small businesses and start-ups may not be able to provide all documents that most business loans require. Most SME loans require KYC documents, ban statements of the business, GST documents and Income Tax statements.
Theoretically, these documents should get you a MSME loan from any bank. However, banks do favour businesses with minimum operation of 3-4 years and running in profits; an amount which varies as per the service provider.
Business loans have a strict documentation criteria, and the organization will have to provide financial statements, GST documents, Income tax returns, property deeds if owned by the business and lists of shareholders, directors and partners of the firm. Failure to provide any of the above may result in cancellation of your business loan application.
- Collateral requirement
Business loans require collaterals from businesses. Banks also look at the credit history of the business. Only businesses with good credit ratings can avail business loans from banks.
Small companies and start-ups may fall short in their credit rating, which makes MSME loan a lucrative option as the loan providers are generally flexible with the credit history of the business and also do not require any kind of collateral.
Which one to go for?
Business loans and MSME loans differ in the sense that both of these are meant for different types of businesses. Business loans are more suited for medium to large enterprises which are established and in operation for several years.
MSME loans are different in this aspect as they have low eligibility criteria and are meant for micro and small enterprises with low interest rates and easy application.
- What are business loans and MSME loans?
Businesses that are established and have been running in profit since several years can avail business loans. Business loans are available as short-term and long-term loans.
MSME loans are for enterprises whose annual turnover does not exceed the specified threshold. These loans can be used for funding growth of the business.
- What is the eligibility criteria for business loans?
Eligibility criteria for business loans majorly revolve around the creditworthiness of the business as the loan provider needs to ensure that their amount would be duly returned. Apart from that, the financial statements are also required as a proof of profitability of business.
- What is the eligibility criteria for MSME loans?
MSME loans have simpler eligibility criteria as compared to business loans. The business just needs to have their KYC & GST documents in order to avail SME loans.
- What is the rate of interest charged on repayment?
The rate of interest charged against business loans are comparatively lower than SME loans. This is because MSME borrowings are collateral free and have high risks involved.
- How do the loan amount and tenure differ?
Business funds can be taken as loan from banks with relaxed repayment tenure, as the loan amount generally exceeds Rs. 1 Crore. The repayment time for this amount is anywhere upwards of 5 years.
MSME loans usually have a lower sum and have strict repayment options, though many NBFCs have started to relax the repayment criteria recently.
- Can I get a business loan for starting my business?
Some loan providers do offer business loans to individuals for starting their business. However, the eligibility criteria differs as per the provider and the loan amount is low.
- How is a business loan amount calculated?
Business loan amount is calculated as per eligibility which depends on the following criteria:
- Credit score
- Existing loans (if any)
- Monthly income
- Business performance
- How much amount can I borrow collateral-free under MSME loans?
The Reserve Bank of India has mandated that no collateral is required for loan amounts under Rs. 10 lakh. However, if the credit history of the borrower is good, this collateral-free amount can be exceeded up to Rs. 25 lakh.
- Where should I utilize my MSME loan?
A smart way to utilize MSME loans is to diversify the funds on working capital, inventory management and on plants and machinery and purchase of equipment.
- How can I ascertain my business’s capability to repay the loan?
Loan repayment can be approximated using the loan calculator provided online on most loan provider’s websites. Using the loan calculator, you can ascertain a tentative amount you would have to repay against the principal sum borrowed by you.
This result also dies not depend on any specific plan, so it is only for your planning purposes to choose which plan best fulfils your requirements.