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| March 21, 2024

Business Loans vs. MSME Loans – What is the Difference?

When it comes to entrepreneurship and business ventures, securing adequate funding is often a crucial step towards success. Whether you're launching a startup or expanding an existing enterprise, access to capital can make all the difference. This is where loans come into play, providing the necessary financial support to fuel growth and innovation. In today’s time, reputed non-banking financial Institutions like Muthoot Finance provide loans that are specifically tailored to finance business such as a business loan or an MSME/SME loan, helping entrepreneurs to kickstart ventures, cover operational expenses, invest in equipment, or scale up their operations.

What is a Business Loan?

Business Loans, as the name suggests, are financial products designed specifically for businesses. People apply for a business loan for various purposes, including working capital, expansion initiatives, equipment purchases, or even to cover day-to-day operational expenses. The business loan application, its terms, interest rates, and repayment schedules vary based on the lender and the borrower's creditworthiness.

What is an MSME or SME Loan?

According to the definition given by the Ministry of Micro, Small & Medium Enterprises, an MSME is any business with a turnover of less than INR 250 Cr. and where its capital investment in plant and machinery is not more than INR 50 Cr. With the growing number of MSMEs in India, the Government has carried out certain schemes that have enabled banks and NBFCs to provide business loans that cater specifically to MSMEs.

Thus, an MSME or SME loan is a specifically tailored financial product aimed at supporting small and medium-sized businesses. A MSME loan offers easier eligibility criteria, flexible terms, and lower interest rates as compared to traditional business loans to cater to the unique needs of an MSME.

Differences between Business Loans and MSME Loans

If you are planning to apply for a business loan or an SME Loan, it is important to compare both before finalizing one. Here are the key differences between both types of loans:

  • Business Type: A business loan usually caters to well-established businesses which are aiming for growth and expansion. This means that businesses with a turnover of more than INR 250 Cr. and capital investment of more than INR 50 Cr. are not eligible for MSME loans. On the other hand, an MSME loan is a type of business loan specifically for a startup or other smaller businesses falling within the MSME category. Therefore, MSME Loans are more tailored to the unique needs and challenges faced by smaller enterprises.
    Further, businesses falling under retail trade, agriculture, training or education cannot apply for MSME loans.
  • Loan Purpose: Business Loans are usually provided to businesses for a number of purposes, ranging from expansion projects, and bridging cash flow gaps to purchasing equipment or property. MSME Loans, on the other hand, are often structured to address specific needs common among smaller businesses, such as working capital requirements or technology upgrades, marketing etc. Thus, an SME loan is designed to support the growth and development of micro, small and medium-sized enterprises.
  • Eligibility for Loan: An MSME loan has more relaxed eligibility criteria as it is aimed at supporting businesses which have limited operations and fall within the defined MSME category. This may include criteria related to filing tax returns for at least one year, business in the service or manufacturing sector, and the applicant must not have any loan defaults in the past. Before submitting an application for a business Loan, the applicants are subject to eligibility requirements such as a good credit score, must be Indian nationality, and must not have a criminal record, among other requirements.
  • Loan Tenure and Amount: The tenure and amount of MSME Loans are often tailored to the scale and requirements of smaller businesses. These types of loans may have shorter tenures and lower maximum loan amounts compared to traditional business Loans, which are designed to accommodate larger enterprises with diverse financial needs, and therefore have a larger loan amount and longer tenures.
  • Interest Rates: Interest rates for most MSME Loans are lower since they are aimed at promoting entrepreneurship and business growth in the country and are lower risk. However, any type of business loan is subject to the size of the business, creditworthiness, and prevailing market conditions. Business Loans, particularly those obtained by established enterprises with b financial profiles, may offer more favourable interest rates due to lower perceived risk. It is important to check one’s credit score and repayment history when planning to apply for a business loan.
  • Repayment Terms: MSME Loans often come with flexible repayment terms to accommodate the cash flow fluctuations common among smaller businesses. Thus, depending on the ongoing cycle and the plan, the payback duration might range from 12 to 30 months. Business loans have terms and conditions that are dependent on the loan amount.

Backed by decades of experience in providing financial services, Muthoot Finance offers the best business and MSME loans to a broad spectrum of businesses. With minimal documentation, hassle-free processing, and flexible repayment tenures, Muthoot Finance has earned the trust of many entrepreneurs.

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