The Indian economy is supported by the MSMEs. They are the drivers of innovation, generate employment, and are a huge source of exports. However, lack of access to appropriate and timely financing can be regarded as one of their most problematic issues. Being familiar with the types of business loans in India is essential for MSMEs that look forward to growing, expanding their operations, or merely need to manage their businesses better.
Whether you need to get working capital to fill that large export order or even obtain cash to upgrade machinery, there is a loan to suit every need. This guide will take you through the major types of business loans that are availed by Indian MSMEs and help you make better decisions.
Navigating the Lending Landscape for MSMEs
India has several funding options when it comes to MSMEs in accordance with their demands and development phases.
Secured vs. Unsecured Business Loans
Business loans mostly fall into two broad categories:
- Secured Loans – The guaranteed loan requires collateral assets such as property, machines, or stock.
- Unsecured Loans– These are given depending on the creditworthiness of the business, and they do not require any pledging of an asset.
Unsecured options are rapidly gaining popularity in small businesses that do not have valuable fixed assets.
Working Capital Loans
A working capital loan will assist with the recurring expenses, such as salaries, rent payable, utility bills, and supplier payments etc. This is because they are short-term loans, and they guarantee an uninterrupted flow of cash during the low-revenue periods or during late receivables.
This is one of the most accessible forms of business loans in India, especially for business entrepreneurs engaged in MSMEs.
Term Loans
Term loans give the borrower an amount of money to repay over a certain interval of time with EMIs of a monthly payment. They are normally utilised in expanding business, acquiring equipment, or infrastructure development. Depending on the lender and the profile of the business, the repayment range can vary between 1 to 10 years.
Term loans are offered as secured and unsecured loans based on the value of the loan and the business credit rating.
Line of Credit (Cash Credit/Overdraft)
It is an excellent source of financing for expanding businesses. A line of credit functions as a credit card. You are granted a credit limit, and you can draw funds whenever you need them. Only the amount drawn is charged the interest and not the limit. This model provides MSMEs with flexibility in financial terms without full loan EMIs.
It is one of the most advanced funding options in the category of business loans in India, which applies to companies with unpredictable cash flow.
Invoice Financing (Bill Discounting)
It is an effective medium even for exporters and businesses that have to cope with late remittances. Once your customers take 30-90 days to pay their invoices, invoice financing can help you get instant cash. The lenders give up to 90 per cent of the invoice value, and you repay after the client pays dues. This is better than waiting on receivables to accelerate liquidity.
This alternative reduces credit risk and maximizes cash flow among the MSMEs that deal with larger buyers.
Equipment and Machinery Loans
Manufacturing relies on capital investments, and loans can be useful here. These loans are aimed at purchasing equipment or renovating worn-out tools. Interest rates are normally lower because the asset one buys is used as security. The terms of repayment may differ with life and usage of assets.
This type of business loan in India is an appropriate option applicable to MSMEs in the sectors that are characterized by high production.
Government-Backed Loan Schemes for MSMEs
The Indian government provides its small businesses with a number of finance plans with comfortable terms.
Mudra Loans (Under PMMY Scheme)
Available on Pradhan Mantri Mudra Yojana, such loans serve micro and small businesses having a ticket size of between 50,000 rupees to 10 lakh rupees. They exist in three divisions, namely Shishu (The smallest), Kishor (Medium-sized), and Tarun (large-sized), based on the amount of business assets and financial requirements.
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
This scheme allows loans without collateral up to 2 crores of rupees by the lending institutions that are members. The loan is guaranteed by the government, and this motivates banks to lend money to small businesses with more assurance.
They are financial inclusion schemes and are suitable for startups and MSMEs in the informal sector.
Export Finance for MSMEs
Moving abroad into new markets requires another type of loan option. Export finance is when the money or finance is available before the good is shipped (pre-shipment) or after the goods have been shipped (post-shipment). The loans assist the enterprise in stabilising production and handling the cycles of international payments.
There are a lot of websites that provide quick screening of paperless export financing, which is the perfect solution for MSMEs who want to venture into international markets.
Choosing the Right Loan for Your Business
There are a lot of alternatives to use, and the choice should be strategic enough.
Match Loan Type with Business Purpose
In case you require funds to purchase raw materials, apply working capital loan. A term loan is the most suitable for long-term projects. Invoice financing is the appropriate one in the case that you operate bulk invoices.
Consider Repayment Capacity and Tenure
Avoid over-borrowing and only apply for the loan amount that you can pay back without hassle, focusing on the cash flow of your business.
Choose Smart, Grow Fast
India has various kinds of business loans; learning about each of them will help any MSME grow sustainably. As a business grows, it requires either short-term working capital or long-term investment funds, and the Indian lending ecosystem has a solution for every business stage. The wiser the decision you make on financing, the sooner your organisation can expand, match the competition, and help you shine.
Searching for fast and collateral-free finance solutions? At Credlix, we are experts in such funding solutions as invoice discounting, working capital finance, and pre-shipment credit, which are considered MSME and export-oriented funds. Our digital-first solution provides fast-track approvals and low paper intensity.
