On the surface, it is a straightforward question, with a fairly straightforward answer. The loans given to or taken by companies within the MSME or SME sector are called – SME or MSME Loans.
The earlier classification of MSME, based on the MSMED act of 2006, was done on the basis of total investment. If from the manufacturing sector, and on the equipment required by the outfit for provision of their services, there are ceilings which break down them into three parts – Micro, SME, and MSME.
However, in 2018, the then minister of MSME, Giriraj Singh proposed to redefine what it meant to be an MSME. He proposed to change the definition from “investment into plant and machinery” to be defined by “annual turnover.” He also removed the distinction between Manufacturing and service sector within the umbrella.
The new definition is as follows:
- The Microenterprises have an annual turnover of less than or equal to Rs. 5 Crore
- Small Enterprises have an annual turnover between Rs. 5 to 75 Crores
- Medium Enterprises have turnover ranging from Rs. 75 to 250 Crore
This new classification is done according to the global standards of how these enterprises are classified, and at the centre of the system is GSTN (Goods and Service Tax Network). This new classification will make it easier to recognise and organize enterprises and make it smoother for companies to operate and make it easier to avail government subsidies.
Also, according to the Reserve Bank of India, MSME falls under the priority sector lending, which means it is easier for MSMEs to avail loans. Priority Sector lending can be elaborated as – the sector which provides a significant amount of employment affects a large number of populations, and are employment-intensive to weaker sections of society.
Having classified the MSME in three parts, we can now fully answer the question – what are MSME Loans?
The loans can be either be secured loans or unsecured loans. Secured loans are when the loans are tied to a personal asset of a person. When you take a secured loan, you pledge a specific property to the lender as security for repayment of the loan you have taken. In the event of a default, your property can be forfeited. The property you have pledged is referred to as the loan collateral
In unsecured loans, the borrower does not need to pledge collateral to take an unsecured loan. An unsecured loan is solely issued on the basis of your ability to repay the loan or your creditworthiness. An unsecured loan, sometimes called a signature loan, is supported only by the borrower’s credit score, rather than by any type of collateral.
Unsecured loans have several advantages over the secured loans. Firstly, the collaterals are not required at all. So, the absence of high-valued assets doesn’t stand in the way of business expansion. Additionally, we at ZipLoan, not only offer a collateral-free loan but also at a quick processing time of three days. While most lending depends on CIBIL Score, at ZipLoan, we have a fairly sophisticated system called – the ZipScore, which goes beyond the CIBIL Score.
Moreover, banks have been encouraged to achieve a 20 percent year-on-year growth in credit to micro and small enterprises. It is also advised to encourage MSME loans, and banks should open at least one specialised branch to cater the MSME sector. As of 2017, there were 2998 specialised branches created specifically for MSME loans. SBI itself has 16 kinds of SME loan schemes with a different purpose, interest rates, eligibility, and catering to different entrepreneurial needs.
MSME enterprises can avail Machinery Loans, which enable them to invest, buy, and advance their machinery, which can improve their business and even help them scale-up. Machinery and equipment are also one of the costliest assets a business invests in. At ZipLoan, we offer hassle-free machinery loans to aid you in your business journey. Our machinery loans require a few documents and are quickly processed.
Another loan that MSMEs can avail is Term Loans. A term loan provides the business with a certain amount of cash and requires regular payments over a set time to repay the loan plus interest back to the lender. Businesses can use term loans to fulfil a huge one-time cash need or purchase fixed assets such as machinery, equipment, or a factory building. Term loans can be secured or unsecured, which means they may or may not require collateral.
And while expansion is a more celebrated aspect of MSME, a major aspect is having working capital, and being cash-rich. MSMEs can avail working capital loans to ensure day-to-day smoothness of operations.
Along with the traditional lending sector, several NBFCs have become the backbone of MSME growth and provide the required boost to India’s shining economy.