The Indian economy is dependent on micro, small and medium enterprises (MSMEs) for its growth. MSMEs contribute up to 30% of the nation’s gross domestic product (GDP), 40% of total exports, and employ 110 million people. It is no wonder that when the Prime Minister announced India’s Aatmanirbhar Bharat or self-reliant plan in an attempt to tackle the uncertainties around COVID-19, MSME loans, subsidies, and initiatives were an integral part of it.
If you want to apply for an MSME loan for new business or expansion - be it a business loan for a restaurant or an online shop loan - this blog will help you understand whether you are eligible and what the process for application of MSME loans from the government or private sources is.
What is an MSME?
While announcing the Aatmanirbhar Bharat initiative, the government redefined the criteria of MSME classification in June 2020. This change was brought about to make MSME loans accessible to more business units. Now, businesses will have to use investment in plant and machinery, and annual turnover to determine which bracket they fall under.
- Manufacturing and service units with investment less than 1 crore rupees and turnover less than 5 crore rupees per annum qualify as Micro Enterprises
- Manufacturing and service units with investment less than 10 crore rupees and turnover less than 50 crore rupees per annum qualify as Small Enterprises
- Manufacturing and service units with investment less than 50 crore rupees and turnover less than 250 crore rupees per annum qualify as Medium Enterprises
Businesses under these classifications are eligible to apply for MSME loans, subsidies and assistance for setting up a new business or expanding an existing one. If your business does not fall under any one of these categories, read our blog on what is an SME loan and the different types of SME loans for further details.
MSME Loan eligibility
Apart from the classification requirements mentioned above, businesses must also meet other MSME loan eligibility criteria:
- Business must be registered in India
- Business must be engaged in manufacturing or service
- Enterprise can be a sole proprietorship, limited liability partnership, cooperative or a HUF business
- Business should not be under any of the blacklisted categories by the government
- For an expansion loan, the business must have been in operation for at least 6 months
If your business checks all the boxes of MSME loan eligibility, you can apply for a “Udyam” certificate from the government, officially qualifying the business unit for MSME benefits. Udyam registration is a simple self-certification process online.
A new or existing business can get registration using their Aadhar number, GST details, and basic business documents. Businesses that are sole proprietorships, limited liability partnerships, cooperatives, societies, or established under the Hindu Undivided Family are eligible to register. Although registration is not compulsory, getting a Udyam certificate has many benefits for MSMEs such as assured payments within 45 days, competitive edge while applying for government tenders, government-approved MSME subsidies and loan benefits, collateral-free loans, etc.
Documentation Requirements for MSME Loans
Once a business is qualified as an MSME based on all eligibility criteria, it can apply for an MSME loan. There are numerous government MSME initiatives such as the MUDRA loan, Mahila Uddyami Scheme or Annapurna Scheme or loans from public or private banks specifically for MSMEs. Many of these loans can be applied both online or offline.
To apply for an MSME loan, a business will have to submit certain documents for verification. The following is a generic list of documents that will be required:
- Proof of Identity: All businesses will have to submit ID proofs such as an Aadhaar card, PAN card, Voters ID card, driving license, or passport.
- Proof of Address: For businesses that own their land or building, property ownership papers, possession letter, allotment letter, property tax receipt or municipal licenses will be acceptable address proof. For rented property, rental agreements, utility bills, ration card or any other accepted proof may be submitted.
- Financial Proof: In addition to ID and address proofs, businesses will also need to furnish financial proof in the form of profit and loss statements, balance sheets, at least 6 months’ bank statements, and ITR documents (if applicable).
- Other Business-Related Proofs: Other proofs pertaining to the business such as firm registration certificate, partnership agreement, Memorandum of Associations, Article of Associations, and copies of applicable licenses may be required.
- Business Plan: For a new business that may not have business activity proofs, a detailed business proposal or plan may be required.
- Collateral Proof: In case of a secured loan, documents for the collateral or security will also need to be produced.
- KYC Requirements: Apart from the ID and address proofs for KYC, passport-size photographs of the loan applicants will also be required.
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