What is MSME Loan: Definition, Eligibility, and More


Micro, Small, and Medium Enterprises (MSMEs) have been taking over the Indian entrepreneurial landscape. Utilizing advanced technology and innovative processes to beat the industry giants, MSMEs are gaining serious momentum, and so are MSME loans. According to a report by TransUnion CIBIL and SIDBI, the credit demand from MSMEs grew by 1.29 times year-on-year for the quarter ending September 2022. Considering the promising future of MSME loans, let us understand what is an MSME loan, who is eligible for one, and related concerns.

In this blog, we will discuss the following topics of concern:

  • ➔ What is an MSME loan?
  • ➔ Purpose of MSME loans
  • ➔ MSME Loan Eligibility
  • ➔ Documents Requirement for MSME Loans
  • ➔ FAQs about MSME Loans
  • ➔ Key Takeaways

What is an MSME Loan?

An MSME loan is a financial product designed to meet the financing needs of small and medium-sized businesses. MSMEs are a crucial part of the economy in many countries, as they contribute significantly to job creation and economic growth. These loans are tailored to the specific requirements and limitations of smaller businesses, which may not have access to the same financing options as larger corporations.

Commonly, MSME loans are characterized by the following aspects:

  • ● Loan Size:

    MSME loans typically have lower loan amounts compared to loans provided to large enterprises. The specific loan size varies by country and financial institution.
  • ● Loan Tenure:

    The repayment period for MSME loans can range from short-term (a few months) to long-term (several years), depending on the purpose of the loan and the borrower's preferences.
  • ● Purpose:

    MSME loans can be used for various business purposes, including working capital needs, purchasing equipment or machinery, expanding operations, upgrading technology, or funding new projects.
  • ● Eligibility Criteria:

    MSME loan eligibility criteria requires a business to meet certain conditions related to its size, turnover, and structure. These criteria can vary by region and lender.

Let us understand the last two criteria, MSME loan purpose and eligibility criteria, in further detail, as they are more complex than they seem.

Purpose of MSME Loans

MSME loans serve essential purposes such as:

  • ● Funding start-up projects
  • ● Maintaining working capital
  • ● Supporting growth and expansion
  • ● Adopting new technology
  • ● Bridging cash flow gaps
  • ● Trading in international markets
  • ● Ensuring financial stability
  • ● Job creation
  • ● Meeting regulatory requirements

MSME loans are vital for the success and economic development of small and mid-sized businesses vying for further growth. These loans make up the fuel that powers the engine of the MSME sector in India.

MSME Loan Eligibility

In India, MSME loans are primarily governed by guidelines provided by the Reserve Bank of India (RBI) and the Ministry of Micro, Small, and Medium Enterprises (MSME Ministry). Their MS guidelines are designed to support and promote the growth of MSMEs by facilitating access to credit. Here are the key MSME loan eligibility criteria in India:

  • 1. Business Size:

    The business must fall within the defined criteria for micro, small, or medium enterprises based on its annual turnover and investment in plant and machinery or equipment. MSME loan eligibility thresholds are as follows:
    • Micro Enterprises: Turnover up to Rs. 5 crores and investment in plant and machinery or equipment up to Rs. 1 crore.
    • Small Enterprises: Turnover between Rs. 5 crores and Rs. 75 crores and investment in plant and machinery or equipment between Rs. 1 crore and Rs. 10 crores.
    • Medium Enterprises: Turnover between Rs. 75 crores and Rs. 250 crore and investment in plant and machinery or equipment between Rs. 10 crores and Rs. 50 crores.
  • 2. Business Type:

    The business must be registered as an MSME under the MSMED Act, 2006, or any other registration recognized by the government.
  • 3. Creditworthiness:

    Lenders will assess business creditworthiness by reviewing business's financial statements, credit history, and repayment capacity. A good credit score and a history of timely payments can improve your MSME loan eligibility.
  • 4. Collateral:

    Depending on the loan amount and the lender's policies, the applicant may be required to provide collateral or security to secure the loan. However, government-backed schemes like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) provide credit guarantees to banks and financial institutions, reducing the collateral requirement for eligible MSMEs.

Documents Requirement for MSME Loans

Finally, let’s have a look at the documents an MSME loan applicant is generally required to submit:

  • ● Business registration documents (GST no., PAN Card, etc.)
  • ● Financial statements (balance sheet, profit and loss statement)
  • ● Income tax returns
  • ● Bank statements
  • ● KYC documents (Aadhaar, PAN, passport-size photos, etc.)

Key Takeaways

MSME loans provide much-needed capital to medium and small companies in India so that they grow and expand their operations. MSME loans can be used for a plethora of reasons including the purchase of capital assets, hiring talent, and funding day-to-day operations. These loans help budding entrepreneurs realize their business vision while contributing to the development of the Indian economy.

If an enterprise is a registered MSME and fits the size and legal requirements for getting an MSME loan, then they can approach institutions like Unity Bank. Unity Bank’s MSME loans go up to Rs. 3 crores in amount and come with reasonable rates and automated processes.

So, if you are an MSME owner looking to take your business to the next level, look no further than Unity Bank and apply today.