MSME Loans: Types & Schemes of MSME Loan

Micro, Small and Medium Enterprises (MSMEs) are essential to India's overall economic growth and development. They contribute 33% of India's GDP, generating over 120 million jobs across regions.Despite their immense contribution to the economy, most MSMEs face a common problem — access to finance. They often lack the necessary collateral or credit history, making it difficult to secure loans through conventional banking channels. But, the advent of a robust financial services technology ecosystem in India is proving to be a game changer for MSME credits.NBFCs and FinTech companies are creating new opportunities for MSME finance. Also, the Indian government is taking active steps to enable the financial inclusion of MSMEs by rolling out various types of MSME loans.Also Read: MSME Loan: Factors to Consider Before Applying MSME loans meet the financing needs of these enterprises. They have remained an ideal choice for small business owners . But did you know that MSME loans cater to different areas of MSME finance? Read on to know more.

MSME loans are different from business loans . They are relatively affordable, and the terms are relaxed. The following are types of MSME loan schemes 2023 that you can apply for:

Working capital loan

A working capital loan is a type of MSME loan that provides funds to meet the day-to-day operational expenses of a business. These include raw material purchase, inventory management, payment of salaries, payment to creditors and other working capital requirements. These short-term loans help businesses ensure smooth operations by providing an adequate cash flow. Working capital loans can be secured and unsecured. It depends on the lender's requirements and the borrower's creditworthiness. Following are the different types of working capital loans that you can apply for:

• Cash credit: Under cash credit, you can avail of a credit limit sanctioned by a bank or financial institution based on your creditworthiness and working capital. If you fulfil cash credit loan eligibility, then you should apply for this. The interest under this loan is charged only on the amount utilised.
• Overdraft: Overdraft is another MSME product where businesses can withdraw more funds than the balance available in their current account. It provides flexibility for managing cash flow by allowing businesses to overdraw to a certain limit from their account. The limit is sanctioned by the bank or financial institution against which they charge interest on the amount withdrawn.
• Trade credit: Trade credit is extended by suppliers or vendors to businesses through deferred payments for goods or services purchased. It allows businesses to defer payments to their suppliers.
• Invoice financing: Invoice financing, also known as factoring, is a type of MSME finance facility where businesses can obtain funds by selling their outstanding invoices to a financial institution at discounted rates.
• Bank guarantee: This is where a bank or financial institution guarantees the payment of a certain amount to a third party on behalf of the borrower.
• Letter of credit: This is where a bank or financial institution issues a letter of credit on behalf of the borrower. It guarantees the payment to the beneficiary against the presentation of specified documents.

For working capital loans, the lender may ask you to provide collateral. These can include land or property, shares, gold and other assets. However, certain lenders may provide MSME loans without collateral after checking your company's financial statements.

Term loan

A term loan is another major category in MSME finance that provides funds for long-term capital expenditure. It can be used to purchase machinery, set up a new unit, expand an existing unit, or undertake other capital-intensive projects. Term loans get repaid in fixed instalments over a predetermined period.The interest rate on term loans may be fixed or floating, depending on the lender's policies and your credit profile. Following are the different types of MSME term loans that you can apply for.

• Term loan for capital expenditure helps purchase machinery, equipment or infrastructure for business operations.
• Term loan for working capital helps purchase raw materials and inventory or manage cash flow during seasonal fluctuations.
• Project term loan helps set up a new manufacturing unit or real estate development.
• Vehicle loan helps purchase commercial vehicles like trucks, buses or cars for business purposes.

Other MSME loans

The demand for MSME loans is increasing. One of the key benefits is that it also allows you to restructure the loan when needed. While working capital and term loans are the most preferred MSME loans, there are other specialised loan categories as well. Let's look at some of them:

• Equipment/machinery loan: It specifically helps businesses purchase machinery or equipment. This loan enables MSMEs to upgrade their technological capabilities, production capacity and overall operational efficiency.
• Government-sponsored MSME loans: Through various schemes and initiatives, the Government of India offers MSME lending facilities at concessional interest rates and favourable terms. Some popular government-sponsored MSME loan schemes include the Prime Minister's Employment Generation Programme (PMEGP), Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Stand-Up India Scheme and Mudra Yojana.

Read More: Here are five simple steps to apply for MSME loans

• MSMEs are vital to the Indian economy. Access to timely and adequate financing is crucial for the growth and development of MSME products. But finding the right lender is the trick.
• At Aditya Birla Capital, we channel our funds to provide financial support to the MSME sector through various financial products. With quick processing, MSMEs can obtain funds at some of the most affordable rates. So, apply now and get MSME loans in 59 minutes!