As individuals, we have many borrowing options to consider. Depending on the type of requirement, we can choose from options like a personal loan, vehicle loan, car loan, home loan, etc. Similarly, there are many financial institutions in the country that offer different types of loans to businesses. Depending on the size and type of business you own, you can apply for a loan. MSME loans are gaining popularity in the country because of the consistent increase in the number of small and medium scale enterprises.
An MSME loan is different from the traditional business loan. Hence, if you are looking for funds for your business operations, you need to understand the differences between the two common types of loans and then make the right decision. Let us discuss the differences between a business loan and an MSME loan.
- Business type- A business loan is ideal for established business and it is aimed for growth and expansion. In contrast, an MSME loan is suitable for all sizes of businesses and lenders offer funds to startups as well. The loan is available right from the time of the establishment of the business and can be used to get the business off ground. A traditional business loan will not be available right from the startup stage.
- Purpose- Most established businesses apply for a business loan to fund the expansion, diversification, or growth of the business. An MSME loan is usually taken to fund the operations of the business. It helps purchase equipment, meet the day to day expenses, purchase raw materials, invest in commercial vehicles, etc. Define the purpose of borrowing and then approach a lender for the loan.
- Eligibility- The eligibility criteria for a business loan is more stringent than that of an MSME loan. For a business loan, the lender will require a decent credit history and experience in running the business. You will have to show that the business is profitable and you are in a position to make the repayment on time. This also means tedious documentation. In an MSME loan, the eligibility criteria are flexible and there is no extensive documentation. You still need to have a decent credit score and the documentation, which is basic, should be in place.
- Tenure- In a business loan, the repayment tenure will be longer because it also has a high loan amount. You can get a tenure of 5 years or more. However, in an MSME, the tenure will be shorter and the loan amount will be small. But you do have enhanced repayment flexibility and convenience.
These are four major differences between the two types of loans. If you are planning to take an MSME loan for a new business, choose a lender that offers the loan at a low- interest rate and has flexible repayment tenure. You can enjoy highly competitive interest rates on the loan and take your business to new heights. As an MSME, you do not have excess funds on hand to meet the business goals and this is when financial institutions come into play. Choose a reliable, well-established lender for the purpose of the loan and turn your business dreams into a reality.