This is a type of business loan provided to Micro, small and medium enterprises (SMEs). MSMEs in India are defined into two categories, one who are involved in manufacturing and other where they are involved in services. For manufacturing industries, whose investment in plant and machinery is less than 25 lakhs come under micro enterprise, more than 25 lakhs and less than 5 crore rupees is a small enterprise and those where this exceeds 5 crore but is less than 10 crore rupees is a medium enterprise. For services industries, those having equipment investment less than 10 lakhs are classified as micro enterprise and a small enterprise where the investment in equipment is more than 10 lakhs but less than 2 crore rupees and a medium entries where the investment exceeds 2 crores but is less than 5 crore rupees.
The business loan is provided to these MSMEs in the form of bank loans, overdraft facility, leasing and hire-purchase and government funding in the form of grants or loans. At times these loans are also in the form of trade credit, i.e., delays in paying for the purchases of the goods and services for running the business.
The loans may be used for buying new equipment, new product launches, re-launches of existing products, expansion to new locations, setting up of warehouses, marketing and/ or branding exercises.
Government has made mandatory for the banks to provide business loans to these MSMEs and have been advised for 20% yearly growth in credit to MSMEs of which 60% of the total to small enterprise should be given to micro enterprises.
The amount of loan varies between 3 lakhs to 50 lakhs and the repayment period can be anywhere between 1-3 years. The interest rate varies between 18-24%. However, it also depends upon the lending institution and the business profile of the MSME.
More documents to prove the ownership, promoters details, their individual ITR, Bank statements, growth plan etc. may also be needed for securing the loan.