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WHAT IS MSME LOAN

Every entrepreneur with an organization within the MSME sector looks to scale, expand, and grow his business and needs funds for technological, infrastructural and resource expansion. Very few businesses are fully aware of the financial aid that is available in this developing market and end up going to the bank with whom they have opened an account or rely on the money lender who had helped them in their time of need. With financial institutions incorporating new technology in their framework to offer ease and consensus-based capital raising mechanism, entrepreneurs are now introduced to products that are tailor-made for their requirements. Before we dive into the different kinds of MSME Loans available, it is imperative to identify your organization on the nature of its earnings, industry and to categorize it in the micro, small, medium organization bucket.

Micro-scale industries:

Micro enterprises are those organizations that predominantly cater to the service sector which require small amounts of capital to start off. These organizations more than often consist of 1-10 member team and offer services like plumbing, catering, gardening, carpentry, and independent mechanic services in their manifest.

Most Micro industries in the past preferred micro-financing to raise capital to invest in early expenditure, but, in this new age of finance, entrepreneurs are now introduced to tailor-made MSME loans for new businesses that are easy to process, convenient, offer quick disbursal, and offer customized repayment options.

Features of a Microenterprise are:

  • Investment does not exceed INR ten lakhs in the service sector and twenty lakhs in the manufacturing sector
  • Employs 1-10 people in the organization

Small-scale industries:

Small-scale industries play a predominant role in contributing to the economy of India in the MSME market and currently contribute a whopping fifteen percent to the GDP of the country by employing more than 12 crore people. With small scale industries, the objective is to increase the rate of employment, build sustenance, improve the standard of living, improve the distribution of wealth and also to increase the economy of the region. Small enterprises by definition are those industries whose fixed investment does not exceed INR 1 Crore and has its areas of excellence in the manufacturing and service sector.

Medium scale industries:

Medium scale industries play a major role in raising the economy of any region and the governing bodies today are formulating schemes and welfare programs to allow more entrepreneurs who are outside the regular financial system to get the necessary financial assistance for setting up and running a micro, small, or a medium scale industry. Currently, the medium scale market contributes 45% to the manufacturing sector, 40% to the exports revenue and is highest in the employment scale with a whopping contribution of 69%.

What are Medium scale industries and why are they important:
Medium scale industries are those which employ less than 250 people and the cost ceiling ranges between INR 5 crores to 10 Crores in the manufacturing sector and does not exceed INR 5 crores in the service sector.

Medium scale industries often showcase a steady growth in terms of revenue, current assets, employment, and bridge the gap between small and large scale industries.

Medium scale industries open avenues for contribution to the economy by allowing unskilled labour. Thereby slashing the rate of unemployment and improving the standard of living.

Earlier, financial lending institutions were not easily convinced to disburse MSME loan schemes as most MSME loans for businesses were not secured. Hence, the risk.

That said, it was also significantly more difficult for applicants to clear the MSME loan process with government aids and banks, as their route was time consuming and unclear.

With new age financial institutions like FlexiLoans, who incorporate data-driven methods to curate processes that are user-friendly and quick, acquiring an MSME loan, as of today is no longer a strenuous task.

Types of MSME loan schemes:


MSME loans can be broadly categorized into two types according to the source of lending. They are:

  • MSME loans from private financial institutions
  • MSME loans from government bodies

MSME loan for business from private institutions:


MSME loans for business from private lending institutions can be categorized into:

  • Working capital loans
  • Merchant Cash Advance
  • Line of Credit
  • Invoice Financing

Working capital loans:
Working capital loans are taken by those organizations who require an immediate influx of capital to sustain their day to day activities. These include capital to cover infrastructural expenses, paying wages and other ad hoc expenses.Most organizations do not have a steady inflow of revenue and the inflow is dependent on festive seasons, quarterly billing, and other such factors. In these cases, entrepreneurs from such organizations rely on working capital loans.

The advantages of working capital loans are:

  • They offer a repayment tenure from 12 to 24 months
  • Collateral-free lending
  • Competitive interest rate

MSME loan eligibility for working capital loan:

  • The organization should have been in business for at least a year
  • The annual turnover should not be less than INR 24,00,000

Documents required for applying for a working capital loan are:

  • KYC documents for yourself and your promoters (if any)
  • Certificate of business registration
  • Bank Current Account statement for the last 6 months

Merchant Cash Advance:A merchant cash advance is a widely accepted form of lending in the MSME market as it offers quick disbursal, has a linear application process and  involves peer to peer lending as well.  With a merchant cash advance, the applicant receives a lump sum of capital required and is often repaid daily from the organizations POS sales. In this form of lending, the disbursal period is less than 72 hours. This form of MSME loan is beneficial for organizations that rely on sales from POS machines.

Line of credit:
Line of credit is a flexible lending option that allows entrepreneurs to have access to a pool of funds for meeting organizational expenses. In this form of unsecured lending, the applicant receives a lump sum of which the interest is only levied upon the money spent. In this way, the applicant is introduced to a model of MSME loan which allows reduced interest rates. Credit cards for personal use are relevant imagery of the line of credit.

The factors that make Line of Credit as a favorable MSME loan for new businesses are:

  • Collateral-free application process
  • Interest is levied only on the sum spent
  • Allows access to lending ranging from 50,000 to 100,00,000
  • Convenient repayment tenure up to 12 months

Invoice financing:
Invoice financing is a very widely practiced way of raising funds to cover expenses by MSME organizations in India and around the world. Most organizations do not have a steady flow of income as their revenue inflow largely depends on the invoice clearance cycles of the organizations they’ve offered services to. Often there is a gap between invoice generation and its clearance. To bridge this gap, entrepreneurs leverage invoice financing to raise capital on invoices that are yet to be cleared.

In this model of MSME loan schemes, the lending organization takes a percentage of the invoice upon clearance and it generally includes the processing fee, principal amount and the interest.

MSME loan eligibility for invoice financing are:

  • The business must have a minimum operational history of over 12 months.
  • The minimum Annual Business turnover must be over ₹24 lakhs
  • Should be a Supplier/Distributor of a large corporate
  • Should have a valid invoice of work/purchase order worth of at least 1lakh

The government of India is scaling its efforts to change the traditional image of raising capital from government institutions. They are now striving to be quicker, linear, and flexible in their application process, thereby allowing more applicants outside the traditional economy to have access to capital to start their own ventures.

The most prominent MSME government initiatives are:

PM MUDRA YOJANA:

The Pradhan Mantri Mudra Yojana is a government initiative that looks to provide funding to micro, small, and medium scale enterprises whose lending requirements are under INR Ten Lakhs. This scheme is further classified into Shishu, Kishore, and Tarun according to the growth cycle of an enterprise and varies the capital of lending accordingly. The PM Mudra Yojana is an SME loan that takes up relatively longer processing timelines but offers the most competitive rate of interest and prolonged repayment tenures.

SMILE:

SMILE is a Government of India initiative launched in the fiscal year 15-16. This aims to work in tandem with the Make in India program and has allotted a budget of 10,000 crores to achieve its aims.

This program offers a very competitive interest rate of 8%.

The repayment tenure offered is up to 120 months.

With FlexiLoans, a financial lending institution that relies on technology to offer tailor-made solutions for its applicants, entrepreneurs are now opened to a pool of talented experts who aid, guide, and give support throughout the process.

From the acceptance of digital documents to offering the most competitive prices in the industry, the experts from FlexiLoans do it all.

If you are looking to get an MSME loan or have any queries about it, feel free to reach out to us. Our experts will be glad to have a chat with you.


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