MSME Loans are credit facilities provided by banks and financial institutions to small and medium enterprises that fall short of funds when carrying out their business activities or expanding their business. These loans are easy to avail of without offering any collateral at reasonable interest rates. They mainly help with the purchase of advanced machinery, equipment, and stock, and paying salaries to employees. One must always check an MSME loan interest rate, loan amount, processing fees, repayment tenure, collateral, and foreclosure charges for better terms. This article discusses the pros and cons, eligibility criteria, and documents required.
Pros of MSME Loans
MSME Loans are the financial aid that banks provide to small and medium enterprises for conducting their business activities. These loans offer some significant benefits which makes them a considerable option for a new business owner.
Availability of Quick Funds
MSME Loans are applied to acquire funds to conduct basic day-to-day business activities. For this, lenders only check the basic eligibility criteria of the owner such as minimum age, minimum tenure in the field, minimum tenure in the same firm, etc.
Competitive Interest Rates
MSME Loans are helpful because they are convenient to obtain as they often come with competitive interest rates which usually range from 10% to 15%.
Tax Benefits
Apart from quick availability and competitive interest rates, MSME loans offer various tax benefits. These benefits help reduce the taxable income of the firm and eventually lead to lower taxes.
Cons of MSME Loans
MSME loans offer some significant benefits such as competitive interest rates etc. However, one must consider the cons included in these loans. Considering these cons helps one make an informed decision of proceeding with these loans or not.
Processing Charges
MSME loans come with significant processing charges. These processing charges might include, administrative costs, loan sanction costs, foreclosure charges etc. These charges must be understood properly before applying to save yourself from future unnecessary troubles.
High Credit Score
One of the significant demerits of MSME loans is that they ask for higher credit scores for you to apply for these loans. This score should start from at least 700, so if your score is higher than this, then you might expect better loan terms.
Accumulation of Interest
Another demerit is that a huge amount of interest gets piled up. This can even happen in cases where interest rates are lower.
Eligibility Criteria for MSME Loans
With advancements in technology, these loans are offered through various loan app business with competitive interest rates. However, before applying for any kind of loan, one must check the eligibility criteria offered by the lenders.
- CIBIL Score: The CIBIL score that every business needs to maintain should be at least 750. Any score below that is considered non-eligible for a loan.
- Minimum Age: The minimum age of the applicant for applying for these loans should be at least 21 years. Apart from this, the maximum age of the applicant must be at least 65 years.
- Minimum Experience: The applicant must be in the same business for the past 5 years and in the same firm for the past 3 years. This is ensured so that one does not default on repayment.
- Minimum Income: The minimum income of the applicant must be 2 lakhs per year and their turnover must be around Rs. 10 lakhs per year.
Documents Required for MSME Loans
Checking the documents required for MSME Loans in advance is crucial because it helps with the quick processing of loans. Below mentioned documents are what most of the lenders ask for verification to provide loans.
KYC Documents
Banks and Financial institutions ask for various KYC documents which may include Aadhar card, PAN card, passport, voter ID, driving license, and utility bills.
Financial Statements
Apart from KYC statements these financial institutions ask for financial statements of the business. These might include profit and loss (P&L) statements and Balance Sheets.
Business Documents
Businesses also need to provide business documents such as business establishment certificates or incorporation certificates. This ensures that it’s a real business and not something for a namesake.
Other Documents
Apart from KYC, financial and business documents, the lenders might also ask you to provide some other additional documents according to their specific criteria.
Conclusion
Availing of an MSME loan for a small business can be quite comfortable if one knows about the eligibility criteria and documents required in advance. Apart from eligibility and documentation, one should also research various lenders that are offering these loans. Some of the well-known lenders such as Tata Capital are offering these loans at competitive interest rates. Their eligibility criteria are also quite smooth and straightforward with minimal documentation. A thorough research will help you find a suitable lender that offers a loan as per your needs.
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