It can be difficult to arrange enough funds for a new MSME startup without external help. Whether it’s purchasing new machinery, factory premises, or gathering working capital, the required upfront investments are quite high. Without securing the funds on time, businesses can come to a standstill.

Besides, there will be issues with the expansion plans, especially in the competitive MSME sector. That’s why financial organizations like private and public banks and government schemes offer MSME loan for new businesses. It is designed to help Micro, Small, and Medium Enterprises.

What is an MSME Loan?

MSME loans are financial support given to Micro, Small, and Medium enterprises to start new businesses or to expand existing businesses. Govt. has started various MSME schemes to support MSMEs, such as the CGTMSE Loan scheme, PMEGP, Mudra loan, Stand-up India, etc.  

Purpose of MSME Loan

• Working capital
• Purchase of new plant & machinery
• Purchase/Construction of factory building
• Business expansion
• Inventory management

We have created a detailed guide on applying for an MSME loan for new businesses for faster and hassle-free approval.

Step-by-Step Guide to Applying for an MSME Loan for New Business

Step 1: Assess Your Business Needs & Eligibility

To get approval for the MSME loan for the new business, you should determine the purpose of the loan, much amount you require, and the eligibility criteria.

Purpose of MSME Loan 

• Plant & Machinery, Factory Building, Equipment, Working Capital, or Business expansion
• Require funds for short-term or long-term

How to Decide MSME Loan

• Cost of Factory building, Plant, Machinery, equipment, Furniture, etc.
• For Working Capital, determine operational costs of rent, salary, inventory, raw materials, and marketing costs.

Eligibility Criteria

• MSME Certificate – Udyam Registration
• Credit Score/CIBIL Rank – Personal & Business Credit Score Requirements
• Repayment Capacity – Secured or unsecured

Note: Promoter Experience/Business Vintage will give an added advantage for the MSME Loan.

Step 2: Select the Right Type of MSME Loan

Selecting the right type of loan is the most crucial step, as if selected wrong type your application for the government subsidy will be rejected. Certain subsidy is only available for the term loan. So, select type of loan wisely based on your purpose, amount and the repayment capacity.

Different Types of MSME Loans for Start-ups and New Businesses:

1. Term Loans: Long-term funds for larger upfront investments or business expansion, such as for machinery, Equipment, Construction of buildings, and factory setup.
2. Machinery Loans: Helps purchase new Plant & Machinery
3. Working Capital Loans: These help manage cash flows, laborer salaries, and daily expenses.
4. Overdraft: Revolving credit funds for ongoing business requirements.
5. Letter of credit (L/c), Bank Guarantee (BG), etc.

Step 3: Prepare Required Documents

You need to prepare all the necessary documents such as PAN Card, GST, Udyam Certificate, Bank statements, ITR, balance sheets, Quotation, project report with financial data, and collateral security documents etc.

Step 4: Choose the Right Lending Institution

MSME Loan is provided by Nationalized Banks, Private Banks, Co–operative Bank, SIDBI, NBFC, etc. While deciding on the most feasible lender, consider these variables:

• Interest rates being offered
• Collateral requirement
• Margin money requirement
• Allowable loan amount
• Government Subsidy Benefit
• Loan tenure or the repayment term
• Loan processing fees and service charges
• Customer service
• Flexibility in loan repayment

Note: MSME Term Loan taken from NBFCs will not be eligible for certain MSME Subsidies such as capital &Interest subsidy.

Step 5: Submit Your Loan Application

• For the offline method, you will have to visit the bank in person.
• You can also apply for the loan through the online portals of different lenders or government schemes.

Step 6: Follow-up and Loan Approval Process

You also need to follow up with the lender about the assessment process. Proper verification and appraisal will be conducted by banks to determine your creditworthiness. The approval timeline for an MSME loan for a new business varies according to the loan type, scheme, and lending institution.

Step 7: Loan Approval, Documentation & Disbursement

Once your loan is approved, the bank or NBFC will issue the sanction letter, which includes interest rate, processing fees, and repayment details. After that, you can take disbursement of the loan based on your requirement and the type of loan sanctioned.

Documents Required for MSME Loan Application

The following are the major documents you will need to submit for an MSME loan for new businesses.

• Income tax returns
• KYC documents like PAN card, Aadhar card, and Voter’s ID
• Business registration certificates like Pan Card, GST papers, Udyam registration certificates, and trade licenses
• Collateral document, if necessary
• Bank statements for the past 6 to 12 months
• Financial statements like balance sheets and profit and loss statements
• Quotation/Performa Invoice

Common Mistakes to Avoid While Applying for MSME Loans

• Your loan will get rejected if any document is missing or doesn’t have the proper details as expected.
• Do not ignore checking out the loan terms and conditions. Otherwise, you may end up with a higher interest rate or a shorter repayment term.
• Also, do not overlook checking your repayment capacity while applying for the loan. It can lead to severe financial problems later on.

Conclusion

With an MSME loan for new businesses, you will have enough monetary support to set up a manufacturing unit, meet daily expenses, purchase new plant & machinery, expand your business, and manage working capital requirements. However, you need to follow the detailed process explained above to ensure your loan application gets approved.

Any mistake can lead to its rejection, causing your business operations to come to a standstill without proper funding. SDS Fin Advisory LLP simplifies the MSME loan process, ensuring hassle-free approval with the lowest interest rates and maximum subsidy benefits to help your business grow seamlessly.