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The ease of doing business in India has improved drastically over the last few years. As per the World Bank’s report on ease of doing business (2020), India was ranked 63 out of the 190 economies. Earlier, India stood at the 80th position. This ascent was a significant achievement. Much of this can be accredited to the growth of the Micro, Small & Medium Enterprise (MSME) segment.

There are two main reasons for this development. The first one is the digital infrastructure improvement, and the second is the ease of obtaining loans for businesses. Today, starting a business with the help of an MSME Loan or different credit schemes is easier than ever. Read on to learn more about it.

What are MSME Loans?

Did you know that the MSME sector employs over 40% of the Indian workforce? Therefore, it is also known as the backbone of the economy. However, today, most start-ups fail due to cash flow challenges. To address this situation, the Indian government created lucrative credit schemes for helping micro, small, and medium enterprises. MSME Loans can be explained as business loans for the MSME sector to help them manage business operations smoothly without worrying about the cash flow. As per the Financial Year 2021’s data, the loan disbursals to MSMEs were approximately USD 128.06 Billion. The goal is to rejuvenate these sectors to achieve broad economic objectives.

Documentation for MSME Loans

MSME Loans are undoubtedly lucrative for small and medium-sized businesses. However, the documentation process can be a little lengthy. It is done to limit the exploitation of this scheme. The MSME Loan documents requirement can be classified under three categories i.e., general documents, financial documents, and business-related documents. Let’s take a quick look at all three types.

  1. General documents

The general documentation requirements for availing of MSME Loans include Identity proof, address proof, and passport size photographs. For identity proof, the acceptable documents include Aadhaar cards, voter ID, passports, and driving licenses. For address proof, the acceptable documents include rent or lease agreements, ration cards, utility bills, and Aadhaar cards.

  • Financial documents

As a part of the MSME Loan verification process, applicants must also submit essential financial documents like bank statements, GST/Sales tax receipts, income tax returns, and collateral documents (if required). Most lenders ask to submit the bank account statement for the past year and ITR for the last two years. Collateral documents are not necessary in all cases. However, the applicant might have to show the collateral documents in some instances. Make sure to check the exact requirements before submitting.

  • Business-related documents

The last set of documentation requirements includes business-related documents. The most commonly asked business documents include proof of business registration, proprietor and company PAN card, balance sheet, and turnover. Sometimes, the lending institution may also ask to submit the articles of association, memorandum, etc.

MSME loan eligibility

Now that we have learned about the documents needed to apply for MSME Loans, let’s understand the eligibility criteria for the same.

  • As per the age criteria, the applicant must be at least 22 years old while applying and shouldn’t be over 65 before maturity
  • The applicant must have been in the business for around three years and should have relevant business experience of at least five years
  • The income generated from the business must be at least INR 2,00,000 a year, and the yearly turnover should be greater than INR 10,00,000
  • The business must have generated profits for at least two years
  • The business must be registered as an MSME on the Udyaan online portal and have the required certificate

Additional Read: Is it Necessary to Pay a Down Payment for a Business Loan?

Benefits of an MSME Loan

There are tons of benefits offered to businesses through MSME Loan schemes. Here are some of the most prominent benefits of applying for an MSME Loan.

  • Businesses can access up to INR 50,00,000 through MSME Loans easily. The application process is simple, and disbursement is quick. It also caters to the urgent financial needs of businesses.
  • Online portals to apply for MSME Loans and submit the required documents available to improve the user experience
  • Can opt for a long repayment tenure as per the needs, and repayment capacity
  • Lucrative interest rates to reduce the overall interest charges and support business growth
  • Numerous government-backed schemes grant easy loans to MSMEs. These loans are disbursed through different financial institutions under the government’s MSME schemes. In addition, many loan schemes don’t demand any collateral from the business owners.
  • MSME Loans also offer subsidies to chosen business segments for purchasing tools and machinery.