Funding options for MSMEs in India

Classification of MSMEs:

As per the MSMED Act 2006, the Micro, Small and Medium Enterprises are divided into two classes:

1.       Manufacturing Enterprises: The enterprises which are engaged in the manufacture or production of goods pertaining to any industry (as per the list appended as Annexure I), or employing plant and machinery in the process of value addition to the final product having a distinct name or character or use.

2.       Service Enterprises: The enterprises engaged in providing or rendering of services (Industry classified as per the list appended as Annexure I).

Annexure I: List of Industries

The limit for investment in plant and machinery / equipment for manufacturing / service enterprises for MSMEs is as below:

Debt Funding for MSMEs:

Every business, Micro or Small or Medium or Large, requires funds at different stages of the business cycle, to grow or to continue operations.

The following types of debt funding (MSME loan) options are available for MSMEs:

1.       Long and Medium “Term Loans”

2.       Short “Term Loans”

3.       Working Capital Cash Credit

4.       Bridge Loans

5.       Refinance to ailing units

The above mentioned Credit Facilities are available from variety of institutions, viz:

1.       Commercial / Regional Rural / Co-operative Banks

2.       Non-Banking Finance Companies (NBFCs)

3.       State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs)

4.       Small Industries Development Bank of India (SIDBI) – Refinance and Direct Lending

All Banks, NBFCs, SFCs, SIDCs, and SIDBI provide Long and Medium term loans, for purchase of land, construction of factory building / shed, and purchase of machinery and equipment.

Short term loans are generally provided by Commercial and Co-operative Banks, and NBFCs, for purchase of raw materials, spares, consumables, payment of wages, and other immediate manufacturing and administrative expenses.

Working Capital Cash Credit Facility is provided by all Banks and a few SME-thrust NBFCs, for the working capital requirements of the MSMEs.

Composite Loans (Term Loans + Working Capital Cash Credit Facility) can also be sanctioned for new or established businesses.

Find out the most suitable funding option available for your business here. To apply for an MSME Loan, MSMEs are required to furnish the following:

1.       Loan application (as per the financer’s format)

2.       A project report (along with high level financial projections)

3.       Audited Financial Statements along with Income Tax returns for the business, for the last 3 years

4.       Income Tax Returns along with the computation of income of all the promoters

5.       KYC Documents of the company and promoters

6.       Quotations for purchase of machinery equipment, etc (for term loans)

7.       Architect’s cost estimations (for construction of factory building/shed)

8.       Chain of documents of property offered as mortgage (if the loan does not qualify under the various Credit Guarantee schemes. Check eligibility here.)

9.       Any other documents as may be required by the financer

The financer (Bank, NBFC, SFC, SIDCs, SIDBI) will issue a Sanction or Rejection Letter, after thorough assessment of the loan application.

The important thing to remember here is that 100% finance is not possible for any of the above mentioned requirements of the MSMEs. The financers will require between 25% and 35% margin from the MSME. Margin money will have to be paid up front / stage-wise, as per the terms of sanction.

Debt funding under the various Credit Linked Schemes of the Union Government are also available for MSMEs.

Make an informed decision about the most suitable funding options available, and all the schemes and subsidies applicable for your business by visiting https://msmemitra.com

About MSMEmitra.com:

MSMEmitra.com provides bespoke financial consultancy and business advisory services to Start-ups and MSMEs which do not have a dedicated in-house financial management mechanism in place. For such enterprises, we offer:

1.       Advise on the most suitable capital structure;

2.       Quarterly and Annual budgeting;

3.       Overall Financial Management using smart tools; and

4.       Business Intelligence and Analysis, from a financial perspective.

We are also processing Debt and Equity Funding transactions for Start-ups and MSMEs through our network of Banks, SME-thrust NBFCs, and VC Funds, and providing assistance to business owners in preparation of project reports, financial projections, and pitch decks.

Our company also helps business owners in identifying and availing the benefits of the applicable industry-specific schemes and subsidies through an algorithm-based automated process on our website. Visit https://msmemitra.com to know more.

Thank you for reading.

Disclaimer:

The views expressed in the article are the author’s own. This write-up has been collated from various publicly available materials and secondary data, and MSMEmitra.com cannot guarantee the accuracy of the content. The opinions and expectations arrived at in this article, are based upon the analysis of the Industry by the author and the editorial team at MSMEmitra.com. Readers are requested to check the authenticity of the data at their end, before making any decisions with inherent financial risks.