Business Loans Vs MSME Loans – What is The Difference?

The availability of finance is crucial to the success of a business, throughout its lifecycle. Loans are one of means by which several businesses raise this finance. This could be to start a new venture, or to infuse capital for expansion, upgradation, new technology or even to manage cash flows. Today there are several banks and Non-Banking Financial Institutions like IIFL Finance, that provide empowering business loans to enterprises and professionals for investing in their business.

In this article we discuss general business loans versus Micro, Small and Medium Enterprises (MSME) loans. As per the definition of the Ministry of Micro, Small & Medium Enterprises, an MSME is any business with a turnover of less than INR 250 crore and where its capital investment in plant and machinery is not more than INR 50 Crores. However, there are distinct differences between micro, small and medium enterprises.

The following table differentiates between the latter three as per the categorisation provided by the Government of India

MSME’s contribute to over 99 % of the business establishments in India, generating work for over 60% of the country’s workforce. As they are the backbone of the economy, the government of India has curated several credit guarantee schemes to enable banks and NBFCs to provide MSME loans to enterprising businesses. These loans are referred to as MSME Business loans in this article. A Business Loan referred to in this article is on the other hand a loan granted by banks and NBFCs independently without the backing of any government credit guarantee scheme for MSMEs.

Both general business loans and MSME business loans provide finance for the purpose of starting a business or expanding it. The loan amount could be used for equipment, raw material, research, innovation and development, salaries, starting a new unit in a new location and other necessary business expenditures.

One of the key differences between Business loans and MSME loans is that businesses with a turnover of more than INR 250 crores and capital investment of more than INR 50 crores are not eligible for MSME loans. Any business falling under the category of MSMEs can however apply for small business loans or bigger ones, as per their needs.

Businesses falling under retail trade, agriculture, training or education cannot apply for MSME loans no matter what the size of the business. However, there are several lenders who will offer business loans to such enterprises.

MSME Loans are offered up to INR 2 crores without any collateral if applying under loan schemes secured by the Government of India’s Credit Guarantee Fund for Micro and Small Enterprises. In the case of business loans collateral may or may not be required depending on the lender. Loans without collateral attract a higher rate of interest, however. Repayment tenures usually start at 5 years and may be extendable up to 15 years, depending on the front-end lender in the case of MSME loans. Most small business loans, on the other hand, need to be repaid within 48 months.

While MSME loans usually offer softer interest terms than other business loans, the processing time is considerably longer in comparison. For e.g., as of June 2023, IIFL Finance offered comprehensive business loans for start ups where you could raise up to INR 30 Lakhs within 48 hours, if your business was in operation for at least 6 months. You would be eligible to apply with a business turnover of as little as INR 90,000/- per month.

Loans provide a vital lifeline to businesses today. There are several types of business loan products available for enterprising businesses provided by banks and NBFCs in India. These include Working Capital Loans, Letter of Credit, Term Loans, Bill Invoice Discounting, Overdraft Facility and Merchant Cash Advance. If you are in need of a loan to expand your business, it is a good practice to research the offerings of different lenders to select the best option for you. IIFL Finance offers business loans up to INR 30 lakhs. You can find out more about IIFL’s business loan here.

Whether applying for an MSME loan or a small business loan, have a business plan in hand in order to convince the lender that the loan will help you secure better returns on your business and you have a well-thought of repayment plan in hand. This will help you bargain for better borrowing terms and boost the growth of your business.