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Step-by-Step Guide to Applying for an MSME Loan

| Updated: May 28, 2024 20:19

It is known that Micro, Small and Medium Enterprises (MSMEs) play a quintessential role and are a strong pillar for the Indian economy. To help with the development and growth of these small and micro businesses, the government,  mainstream financial institutions and the newcomers in the markets-NBFCS offer MSME loans.  These loans cater to the specific needs of MSME businesses owners, helping them to go into further heights and meet their day to day cash flow requirements.

Through this article we will provide a clear cut path to how an MSME owner could apply for an MSME business loan for his/her organization with the different options available within the vast MSME lending ecosystem. We will cover things like the criteria for eligibility, the documents required, and the process itself.

Eligibility Criteria to Apply for MSME Loan

First things first you should have a clarity on whether you are eligible to even apply for business loan for your MSME, below listed are some of the factors that would make you eligible for a Business loan.

  • Business Type: Manufacturing and service businesses can apply for MSME loans.
  • Registration: Your business must be registered under the MSMED Act, 2006. You can register your business online through the Udyam Registration portal. Having UDYAM registration officially makes you a registered MSME and validates your existence officially.
  • Monthly Turnover: The maximum and minimum limits of turnover for an MSME business to qualify varies depending on the category (Manufacturing or Services) and sub-category (Micro, Small, or Medium). You can find the latest turnover limits on the MSME Ministry website. Ideally most lenders prefer to have MSMEs to have at least fifty thousand/month in turnover to consider them eligible, however this metric can easily vary from lender to lender.
  • Vintage: Lenders prefer giving out funding to businesses who are at least 1 or 2 years in operation which reduces the risk undertaking of the lenders and adds a layer of security.
  • Credit Score: Credit score is one of the basic metric considered in loans of any type be it a business loan or personal loan, having a decent credit score(again differs from lender to lender) helps increase your chance of getting a loan approved.
  • Note: The criteria of eligibility is unique for most vendors but having the above points cleared will definitely increase your chances of getting a successful loan approval. It is recommended to directly check with your preferred lender to know the specifics if you have any preferences as such. NBFC lenders will have more of a relaxed criteria compared to the age-old institutional lenders like the private and public sector banks.

Documents Required While Applying for MSME Loan

Having the necessary documents ready streamlines the application process. Here’s a list of the common documents required:

  • Business Identity Proof:
    • MSME Registration Certificate
    • Trade License
    • Company PAN Card (if applicable)
  • Entrepreneur Identity Proof:
    • PAN Card
    • Passport / Voter ID / Aadhaar Card
    • Residence proof (utility bills, rental agreement)
  • Business Financials:
    • Last 12 months’ bank statements
    • Profit and Loss statements and Balance Sheets for the past 2-3 years (if applicable)
    • Income Tax Returns (ITR) of the business and entrepreneur
  • Project Report (if applicable): Specifying your specific need for loan and how you would utilize the funds effectively and how this could help you increase the profit etc could be prepared as a plan and be acknowledged to the lender. This is a miss by most MSME owners and doing this could make you stand out and could gain trust by the lender.
  • Additional Documents: Depending on the lender and loan type, you may need to submit:
    • Property Papers: If you’re offering collateral for a secured loan.
    • Quotation for Machinery/Equipment: If the loan is for purchasing equipment.

How to Apply for an MSME Loan?

How to apply for msme loan? The application process for an MSME loan can be done online or offline, depending on the lender. Here’s a breakdown of the general steps involved:

1. Choose Your Lender:

  • Compare different options you have among NBFCs, Govt options, Banks, and other firms. Study them and conclude on what works in your favor.
  • What you could use to compare are the interest rates, need to provide collateral, amount of loan offered, ease of disbursal, digitalization bureaucracy based roadblocks, processing fee if any, terms for repayment etc.

2. Gather Required Documents:

Ensure you have all the necessary documents mentioned earlier readily available.

3. Apply for the Loan:

  • Online Application: Without a doubt in 2024 appying for unsecured business loan is easier when it could be done through a mobile phone which is the most accessible device for an MSME owner. Lenders website, mobile app based application process would be the easiest among the lot. Most NBFCs are strong in this aspect and makes it effortless for a business owner to apply for an MSME loan.
  • Offline Application: This is the age old traditional approach which is now getting outdated with the arrival of latest tech. Download the application form from the lender’s website or visit their branch to collect a physical form. Fill out the form and submit it along with the required documents at the branch.

4. Loan Approval and Disbursement:

  • Once you submit the application, the lender will verify your details and documents. NBFCs are very fast as they have smart tech implementations like AI and machine learning to help them achieve efficiency.
  • Upon approval, the lender will provide you with a loan sanction letter outlining the loan terms and conditions. Even with an online/offline application process the approval could take anywhere from 1 day to 3 days in the best case scenario.
  • Carefully review the loan agreement and ensure you understand all the terms before signing. Don’t be in a hurry for the required capital, be a responsible businessman as the terms is not something you want to overlook.
  • Once the agreement is signed, the loan amount will be disbursed as per the lender’s process (e.g., direct bank transfer). Again for fast disbursals do consult an NBFC and not banks.

Additional Tips from the author:

  • Prepare a strong business plan: As I mentioned before you can stand out and build confidence in your application by giving additional information. A well crafted business plan showcasing your business’s targets, expected profit from revenue, and how the loan will be used and how the money could be increased in forms of profit can strengthen your application. A deep dive into such numbers and projections is always appreciated by lenders.
  • Maintain a good credit score: Regularly monitor your credit score and take steps to improve it if necessary. Pay any outstanding loans/interest if any to keep it healthy at all times.
  • Negotiate terms: Don’t accept the terms and interest rates right away, instead use your leverages and negotiate with the lenders, if you have a strong case nothing can block things turning in your terms. The entrepreneur in you could put your negotiation skills to work here, afterall you are fighting to scale your own business.

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