Difference between business loans and MSME loans

Do you know the difference between MSME loan and business loan? Do they seem same to you? However, they are not one and the same. There are quite a few differences between them. This article will explain what a business loan is, what a MSME loan is and difference between the two.

Definition of business loan and MSME loan?

Business loan: Business loans are meant for business expansions, product launches or other business needs of the businesses.

MSME loan: MSME loan is usually given to small enterprises including new businesses and startups for business operations such as purchase of raw material, marketing, working capital, etc.

Key difference between business loan and MSME loan

1. Loan amount and tenure: Loan amount of a business loan is higher as compared to MSME loan. It can be anywhere starting ₹50 lakh and beyond. Similarly, tenure of the business loan is longer usually more than 5 years. For MSME loan, amount is usually lesser ranging from ₹1 lakh to ₹50 lakh or so. Accordingly, tenure of the loan is also shorter.
2. Eligibility and documentation: As the loan amount is higher, eligibility criteria for business loan are stringent, and documentation is more. Some of the documents that you need to have for applying for a business loan include partnership deed, directors and partners list, income tax returns, deeds of any property owned by the business, etc. On the other hand, banks and NBFCs are aware that documentation is a tedious task for MSMEs. They may not even possess all the documents required. Hence, the financial institutions ask for GST documentation, income tax returns, KYC documents, bank statements, etc., and specific other documents for approval of MSME loan.
3. Collateral: The business loan is usually secured with collateral. The borrower needs to submit a documentation of business owned property as a collateral to obtain loan. In case the borrower fails to make repayment, bank can liquidate the collateral to recover losses.Alternatively, it is not feasible for new businesses and startups to promise a collateral. Also, the loan amount is lower and hence, MSME loans are usually collateral free. However, in case of collateral free loan, borrower pays higher interest rate.
4. Disbursal time: Business loans usually take longer time to process as the amount is higher and documentation is stringent. The documentation needs to be prepared by the borrower then the bank personnel checks it. In case of business loans with collateral, bank officials visit the property to verify. These added steps consume time. Comparatively, MSME loan involves lesser documentation, is usually collateral free and hence they are approved and disbursed quickly.
5. Interest rate: Business loan’s interest rate is generally lower as compared to the MSME loan’s rate of interest.
6. Credit score: Credit score plays a crucial role in business loan. A good credit score reflects creditworthiness of the business. When a company is creditworthy, chances of getting business loan of up to desired amount is higher. On the other hand, credit score is not a crucial element for a MSME loan.

It must also be remembered that there are MSME loan schemes by the government that allows micro, small and medium enterprises to avail funding for their business. These schemes are unique and have their own eligibility requirements.

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What should you obtain – business loan or MSME loan?

There is no conclusive answer to this question. Whether to obtain business loan or MSME loan, it depends on your business needs. The amount you require, purpose of the loan, your eligibility, etc., will dictate the choice.

For example, if you are seeking working capital loan for day-to-day operations of your business, and the amount needed is ₹10 lakh, you might opt for an MSME loan. However, if you are planning to expand your business by setting up a new plant, the required money might be much higher and hence business loan might the right choice.