Types of MSME Loan

 

MSME loans are business loans offered to the MSMEs or Micro, Small and Medium enterprises or to the SMEs or Small and Medium Enterprises in the form of SME loans. These loans are offered for the advancement of business and other activities like purchase of machinery and raw material, to meet the working capital requirements, and to invest in fixed assets. Banks and financing institutions like NBFCs offer MSME Business loans.  

 However, the interest rates and loan amount vary across the banks and NBFCs. These loans are usually offered to small business owners, women entrepreneurs, and start-ups. Eligible enterprises for this scheme are Sole Proprietorships, Partnership Firms, Manufacturing or service-based micro and small enterprises excluding Retail traders, educational institutions, training institutions, agriculture & Self Help Groups.

MSME loans for businesses are availed to meet working capital requirements, to manage business cash flow, buy equipment/machinery, purchase of raw materials, paying salaries, inventory enhancement, etc.

 

Types of MSME loan:

1.  Working capital loans:

This type of loan is offered by banks to fulfil daily cash requirements. Some of the examples of Working Capital Loan are Cash Credit Loan, Bills Discounting Facility and Letter of Credit etc.

a)  Overdraft Facility on Current Account:

While current account permits unlimited transactions, an overdraft facility enables the enterprise to occasionally overdraw till a sanctioned limit.

b)  Cash Credit Loan:

Enterprises can use a pre-approved cash credit limit to meet their needs related to seasonal, critical, and impromptu working capital financing.

c)   Bills Discounting:

In the wake of urgent liquidity requirements, MSMEs can discount their bills receivable with banks, which charge a certain commission or discount. Banks make the payment upfront and at the end of the bills’ tenure, present it to the enterprise’s client.

d) Short-Term Unsecured Business Loans:

These loans, which usually have a tenure of 1-3 years, are primarily required by enterprises to fund some unplanned business expansion projects.

e)  Loans Offered under the Credit Guarantee Fund Trust for Micro and Small Enterprise (CGTMSE) scheme:

The Ministry of Micro, Small, and Medium Enterprises introduced this scheme to ensure that the existing or new MSMEs receive loans of up to Rs. 1 crore, without any collateral. These loans are supported by a guarantee offered by CGTMSE.

f)    Bank Guarantee:

Under this facility, on behalf of the enterprises the bank offers a guarantee to third parties, which ensures that they receive a specified amount of money, in case the enterprise is not able to fulfil the working contract.

g)  Letter of Credit:

The supplier of an enterprise receives a letter of credit from the bank that pledges complete payment to the vendor after the delivery of supplies.

 

2. Term Loans:

Term Loan is offered to MSMEs for capital expansion, capital expenditure or buying fixed assets. This can be secured and unsecured.

 

If you want to apply for MSME Registration then click here