Based on your requirements, there are various financing options available for individuals like home loans, vehicle loans, and personal loans. For businesses too, the financial institutions offer different business loans. With the growth of the MSME (Micro, Small, and Medium Enterprises) sector, lenders offer special loans for exclusive loan products for MSMEs.
These MSME loans are different from the other business loan and if you are not sure which one to opt for to finance your business, this article will help you. We will discuss the difference between a business loan and MSME loan and which one is apt for your business.
What is a business loan?
The fund offered to establish businesses to finance their needs like launching new products, buying equipment, expanding business, renting more property, hiring employees and many others. The short-term business loan offered help in financing short term needs.
What is an MSME loan?
Loans that are offered to small and medium businesses to expand or finance their daily operations. They too can be used to buy equipment, inventory and increasing working capital. It can also be used for marketing, hiring fresh talent and for legal services.
Difference between business and MSME loan?
While both the loans are used for businesses there are major differences between the two. Let us discuss it in detail.
1. Loan Purpose: Business loans are for meeting the various objectives like business growth strategies, expansion, and diversification strategies amongst others. However, the MSME loan is for meeting objectives like the purchase of raw material, machinery, managing working capital, marketing, expansion of business operations, etc.
2. Documentation: For a business loan, there is a rigid documentation process whereas for the MSME loan the documentation is much more flexible and requires minimum documentation.
3. Interest rate: The interest rate charged by MSME the loan is normally higher than that of business loans. This also helps in using business loan emi calculators.
4. Loan Eligibility: The eligibility requirement for a business loan is more stringent. As the higher loan amount is sanctioned it requires the lender to check the credit history of the borrower and experience of running the business. However, for MSME loan the track record in terms of business profitability is not a crucial factor, thus making the eligibility criteria lenient.
5. Collateral: The business loans provide higher loan amounts; thus, they are secured loans. So, one is required to provide some adequate security to the lender in the form of collateral. At the same time, MSME loans are usually collateral-free.
6. Loan Amount and tenure: The business loan has a longer repayment tenure, like 5 years or more, providing enough time to repay the loan. The loan amount for a business loan is above Rs 1-5 crores.
As MSME loans are smaller in nature, thus they have smaller tenures. However, some financial institutions also offered enhanced repayment flexibility for the convenience of the customer.
7. Time period: As compared to traditional business loans, the MSME loans are disbursed instantly within a few days after submission of the required documents.
8. Credit History: For business loans, the lender checks the credit history of th3 borrower to determine their creditworthiness, thus credit history plays a crucial role. A good credit score helps in availing higher loan amount at the reduced interest rate. At the same time for MSME loan, no credit score is required.
If you too have a business and are looking to grow your business, then based on the above criteria you can determine whether you need a business loan or an MSME loan. More than this it is important to choose your lender with great care. A good lender will help you in getting maximum benefits along with a great loan amount at the flexible interest rate.