Home Finance Key Differences Between A Business Loan and An MSME Loan

Key Differences Between A Business Loan and An MSME Loan

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Similar to how individuals can choose between different secured and unsecured loans to fund their financial requirements, businesses, both big and small, can choose from various financial products available exclusively. Citing the sector’s popularity, several financial institutions now offer personalized loan products for Micro, Small, and Medium Enterprises (MSMEs).

However, these loans differ significantly from standard business loans, in terms of end-use and procurement procedure. It can be difficult for the borrowers, especially first-time applicants, to sort through various products like an MSME loan, business credit, etc. and select the one best matching their requirements.

Business loan vs loan for MSME 

Here are some of the significant differences between loans for MSME and business loans to help businesses make an informed decision.

  • Type of business and purpose of the loan

One of the most significant differences between these loans is the type of businesses that can apply and why they avail them. Established firms with a strong financial record and credit history are provided business loans to fund their daily operations and expansion strategies. On the contrary, loans for MSME are more suited to smaller firms like start-ups and help them run their day-to-day operations and grow in their respective sectors.

Individuals usually avail of a business loan to meet specific objectives pertaining to business growth, expansion, and maybe even broaden their expertise. Meanwhile, an MSME loan’s primary purpose is to help meet daily working capital requirements, e.g. stocking up raw materials, buying and maintaining equipment, planning daily agenda and strategies, marketing, and expanding operations to other avenues.

Hence, small businesses need to ensure that they never run out of working capital.

  • Loan amount and tenor

Since large businesses have a better repayment capacity, the amount sanctioned in a business loan is much higher than the MSME counterpart. While financial institutions consider other factors like credit history and fixed obligations, established companies are unequivocally at an advantage when it comes to availing financial aid from lenders.

Moreover, the tenor of a business loan is also much higher, as financiers ensure that they have enough time to repay the credit. However, MSME loans are usually meant to meet specific short-term requirements and have a shorter repayment tenor.

However, top financial institutes do offer some flexibility when it comes to repayment terms. Approach your preferred lender and enquire the specifics in detail before applying.

  • Documentation

Business loans usually have a rigid documentation procedure, where firms have to submit an audited income report and other proofs of identity and address. While the specifics may vary among lenders, ideally businesses have to submit the following documents:

  • Identity proof: KYC documents- Aadhaar card, Voter ID card , PAN card, driving license, or other government-issued identity cards.
  • Address proof: Passport, telephone or electricity bill, ration card, lease agreement, trade license, etc.
  • Financial documents: IT returns filed for the last year, bank account statements, and balance sheet audited by a certified Chartered Accountant.
  • Ownership proof: Registration document, partnership deeds, proprietorship certificate, etc.

On the contrary, terms of some MSME loans are significantly flexible and are often sanctioned with minimum documentation. This is usually because entrepreneurs and start-ups lack a reliable financial history, while lenders ask for a detailed expansion plan.

Prominent financial institutions like Bajaj Finserv also offer pre-approved offers to expedite the loan application process. Such offers with minimum documentation are available on financial products like personal loans and business loans. You can check your pre-approved offer using a few essential details like name and contact information.

  • Credit History 

The credit history of the borrower plays a crucial role while availing of a business loan. Financial institutions use a borrower’s credit score to determine his/her creditworthiness. A good credit score means that the borrower is financially stable and can comfortably repay the credit on time.

Hence, most lenders sanction business loans to only applicants who show a good credit history manifesting responsible repayment behavior. In addition to increasing the chances of a business loan approval, a good credit score can also help the borrowers avail of a comparatively higher loan amount at a reduced interest rate.

For MSMEs who do not possess a reliable credit history, financial institutions might consider personal credit scores for loan approval. Additionally, the eligibility criteria for loans for MSME are often comparatively lenient.

  • Collateral

Business loans can be secured or unsecured depending on the lender’s requirements. For loans with the high principal, financial institutes might ask for appropriate security.

Comparatively, individuals looking to avail MSME loans often do not have to provide collateral as these enterprises are usually asset-light.

While availing of a business loan or MSME loan, a smart move will be to compare different credit options offered by various financial institutions across the country and select a product that suits company requirements the best. Moreover, one should also enquire about specific needs, which should help improve the odds of procuring a business loan.