How SME and MSME Loans are Providing Much Needed Financing

How SME and MSME Loans are Providing Much Needed Financing to Small Enterprises?


The inherent potential of the MSMe and SME sector can be realised to its full potential with the availability of a number of financing options sponsored by the government and financial institutions.

Small and medium sized enterprises (SMEs) are often considered as the primary engines behind the economic growth and development of a nation. According to the government data, currently, there are approximately 43 million SMEs in India while 36.2 million MSMEs, which employs around 60% of the workforce in the country and contributes around 70% of the total manufacturing output.

However, lack of access to financial services is one of the biggest challenges faced by small business enterprises in India. Inadequate working capital is largely hindering their entrepreneurial growth. According to a survey that covered more than 500 SMEs across India, almost 70% of them believed that lack of easy finances and credit instruments was their most critical challenge. However on the other hand MSMEs required are not in the same situation but their needed financial support could not be ignored. Reason, if MSMEs get these business support, they can lead their business, industry and economy of the country in a better way.

To fulfil this deficit in working capital, many banks and non-banking financial corporations have started offering SME and MSME loan to support these small businesses. It helps the entrepreneurs to cover sudden gaps in finance and meet urgent operational needs on time. Read more to know about the benefits of these loans and how they are providing much-needed financial boost to SMEs in India:

Collateral-free funding

Mostly, SMEs have to rely on internal funding, or cash from friends and family, to launch or expand their business.  Approximately, 70% of the SMEs in India are unable to extract credit due to their inability to provide a collateral. Moreover, stringent rules and lengthy verification process deployed by the banks may delay the funding which can be detrimental to the business.

However, with unsecured SME loans, small business owners can avail collateral free financing to meet their working capital requirements. It means that they are not required to put their personal or business assets on the line to qualify for financing. Additionally, unsecured loans are quick and easy method to raise the capital for meeting diverse business-related financial requirements.

Affordable rates of interest

Lenders usually charge very high interest rates on traditional modes of unsecured financing such as personal loans or credit cards. It can escalate the total cost of borrowing for the entrepreneurs, which will result in lower profits. SME loans, on the other hand, comes with competitively affordable rates of interest since they’re specifically designed to help the small business houses.

A prudent idea is to compare interest rates on business finance quoted by various lending institutions and compare them side by side to look for their features and benefits. It will enable you to take a smart decision based on your business’s requirements and capabilities.

Easy eligibility criteria

Another distinct advantage of opting for SME loans over other modes of raising the finances is its easy eligibility criteria. Since, these loans are meant exclusively to support the small business enterprises, lenders usually follow a lenient approach for disbursing loans to SMEs. Eligibility criteria of business finance generally depends on a few factors such as:

  • Credit history: Credit reports of the company should be credible enough to reflect its loan repayment capabilities.
  • Business plan: Business proposition should be convincing in terms of financial viability.
  • Business experience: SMEs should have a business vintage of at least 3 to 5 years.
  • Annual turnover: A healthy annual turnover reflects the capabilities of the business to repay the loans in time.

Large capital amount

SME loans enables the small business owners to avail large capital funding that can be used for meeting various financial requirements of their business. Be it acquiring new office space, revamping the business infrastructure, upgrading the equipment, stocking up the inventory, or hiring and training of staff, SME loans can be the one-stop financial solution for all business-related obligations.