Micro, Small and Medium Enterprises (MSMEs or SMEs) play a critical role in advancing the economy of a country and in India, they have been growing rapidly over time. The MSME sector is important as it provides employment to a large population of youth in India and contributes more than 40% to the total GDP. Yet, this sector continues to face problems related to funding and acquiring capital assets. Recognizing this need, various institutions have come forward with innovative schemes to offer special business loans, including the Indian government.
As per the new MSME classification in 2020, Micro-enterprises are the ones with less than Rs. 1 crore investments, Small enterprises have less than Rs. 10 crore investment and Medium enterprises have less than Rs. 50 crore investments. Some of the different financing options available to SMEs are discussed below.
Venture capitalists provide equity financing to promising MSMEs. They are financial investors who invest their capital in promising or fast-growing enterprises, to ensure maximum returns on investment. Their main aim is not only to provide funds to growing startups but also to earn a considerable return on investment, as usually their investments are huge. Therefore, getting a venture capitalist to finance your enterprise is more difficult.
Their methods are different as they not only provide money but also bring their valuable experience, guidance and mentorship to the MSME. Their expertise as planners and managers can go a long way but the downside of their involvement is that the business is accountable to them.
This is a new and upcoming method of acquiring funding and is mostly used by business providing services. Essentially, this involves collecting funds online by pitching your business to appeal to ordinary people and get them to invest. The success rate varies; it is possible to get huge funding in a short time or to go completely unnoticed. This depends not only on your business pitch and vision but also on the luck-factor.
Loan against collateral
This is a more conventionally available option for SME loans, but it involves more risk. The business owner acquires a loan from a lender or financial institution by keeping property as collateral. This facilitates getting quick loan amounts at lower business loan interest rates, but a new venture may not succeed immediately. In case your earnings are low and you default on repayment, the collateral can be possessed by the lender.
Government of India schemes
Many MSME loan schemes were launched by the GOI to provide easy funding at low interest rates. Business loan eligibility here depends on parameters like annual turnover, good credit score, age limit compliance, etc.
Two of the most popular schemes are:
- MSME loan in 59 minutes: You can apply for this business loan online and get it approved in just 59 minutes. A maximum amount of Rs. 5 crores can be loaned while the interest rate depends on your CIBIL score and nature of the business.
- MUDRA loans: These loans are generally sanctioned to small businesses working in the service or manufacturing fields. They are categorized into three sections: Shishu loans up to R 50,000; Kishore loans up to Rs. 5,00,000 and Tarun loans up to Rs. 10,00,000.
Thus, a variety of lending options are available for MSMEs in today’s date to promote the growth of the Indian self-employed sector and boost the GDP. You can approach reputed lenders for easy business loans at competitive interest rates.