Get Business Loans for Startups and MSMEs by the Indian Government

There has been a rise in Micro, Small and Medium Enterprises (MSMEs) and startups in India since the introduction of the MSME Act, 2006 and the Startup India Initiative. However, it is a challenge for MSMEs and startups to get funding when their businesses are at an early stage. 

Also, the MSME sector and startups in India have limited access to formal credit. Thus, the government provides various business loans for MSMEs and startups to help them get easy funding for their businesses.

The various loan schemes introduced by the government for the MSMEs and startups encourages them, which will eventually lead to job creation and help in the nation’s economic growth. Thus, several leading financial institutions offer loans for startups and MSMEs at attractive interest rates.

Eligibility to Obtain Business Loans for Startups and MSMEs

Different eligibility criteria are prescribed for various business loan schemes for startups and MSMEs. However, the general eligibility criteria to obtain business loans are as follows:

• The applicant’s age should be more than 21 years, and the maximum age should not exceed 65 years.
• The applicant must be a citizen of India.
• The applicant should have a business plan.
• The MSMEs and startups should be formed as a sole proprietorship firm, partnership firm, company or a Limited Liability Partnership (LLP).
• The MSME and startup must have a good credit score.

Application for Government Business Loans for Startups and MSMEs

The application process for different business loan schemes varies from scheme to scheme. However, the general application process to obtain government business loan schemes are as follows:

• The applicants must visit the respective business loan scheme’s website or the financial institution’s website that provides loans to MSMEs and startups. 
• The applicant must click on the ‘Apply Loan’ option on the website’s homepage.
• The applicant must fill all the required fields, such as owner details, desired loan amount, annual gross sales or turnover, bank account details, years of current business, etc., and upload the required documents.
• After submitting all the details, the scheme’s or financial institution’s representative will contact the applicant to proceed with the loan formalities.
• Once the loan application is approved, the financial institution will disburse the approved loan amount within defined working days to the applicant’s bank account.

Documents Required for Business Loans

• KYC documents such as passport, Aadhar card, driving license, voter’s ID card, PAN card and utility bills.
• Self-drafted business plan.
• Last 12 months’ bank statement and the previous year’s ITR.
• Business incorporation certificate.
• Business address proof. 
• Any other document required by the lender.

Top Government Business Loans for Startups and MSMEs

The top government business loans schemes for startups and MSMEs are as follows:

Pradhan Mantri Mudra Yojana (PMMY)

The Pradhan Mantri Mudra Yojana (PMMY) or Mudra loans provide loans up to Rs.10 lakh to non-farm and non-corporate small and micro-enterprises. The following financial institutions offer Mudra loans under the PMMY: 

• Small Finance Banks. 
• Commercial Banks.
• Non-Banking Financial Company (NBFC). 
• Microfinance Institutions (MFIs).

The applicants can apply for Mudra loans by approaching any lending institutions mentioned above or the PSB (59 minutes portal). The Mudra loans provide collateral-free loans with a repayment tenure from one year to 5 years. Under the PMMY scheme, the Mudra loans are divided as per the developmental stages of business, which are:

• ‘Shishu’ provides loans up to Rs.50,000.
• ‘Kishor’ offers loans above Rs.50,000 up to Rs.5 lakhs. 
• ‘Tarun’ offers loans above Rs.5 lakhs up to Rs. 10 lakhs. 

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is a loan scheme that provides collateral-free loans to MSMEs and startups. This scheme provides a credit facility of up to Rs.200 lakh to MSMEs and startups. It provides a guarantee cover to the lenders in case of default by the borrowers. It provides a 50%, 75%, 80%, or 85% guarantee cover according to the loan amount sanctioned by the lender to the borrowers.

The scheduled commercial banks (private sector banks, public sector banks and foreign banks) and select regional rural banks classified by the National Bank for Agriculture and Rural Development (NABARD) provide loans to new and existing MSMEs and startups. The interest rates of loans granted under this scheme are charged according to the RBI guidelines.

MSME Business Loan for Startups in 59 Minutes

The government launched a new web portal, i.e. PSB Loans in 59 Minutes Portal, to provide Mudra and MSME loans in 59 Minutes. The loans applied on the PSB loans portal will be processed within one hour. After the loan is approved, it will be disbursed to the applicant’s business in the next seven to ten working days. 

The business loan in-principle approvals on the PSB loans portal are up to Rs.5 crores. The loans can be working capital loans or term loans. The loans are provided either with or without collateral. The interest rates of the loans start from 8% onwards. 

The borrower should be IT and GST compliant and have KYC documents and bank statements for six months. There are many partner banks associated with the PSB loans portal, and thus, the borrower has the flexibility to choose any lender bank for obtaining in-principle loan approval. 

Credit-Linked Capital Subsidy Scheme (CLCSS)

The Credit Linked Capital Subsidy Scheme (CLCSS) provides a subsidy to the new and existing MSMEs or startups for technology upgradation. This scheme provides a subsidy of 15% on institutional credit up to Rs.1 crore for identified technologies, sectors or subsectors. However, the cap on the maximum amount that can be availed as a subsidy is set at Rs.15 lakh. The applicant can approach the 11 nodal agencies or banks associated with this scheme to avail of the subsidy.

The CLCSS scheme intends to improve the MSME sector through several interventions in the areas focussing on superior product quality, an upgrade of technology, waste reduction,  enabling cloud computing, design intervention, facilitating intellectual property and incubating ideas. 

Term Loan by Banks

Many financial institutions and banks provide term loans to MSMEs and startups. These loans come with a fixed repayment tenure and loan amount. The interest rate, loan period and loan amount varies from bank to bank. The repayments are usually made in monthly instalments, such as Equated Monthly Instalments (EMIs) for a defined period. 

Term loans can be offered at fixed or floating rates of interest. It can be a short-term or long-term loan approved and disbursed by any bank or financial institution. It can either be secured or unsecured and can be used for various business purposes, such as: 

• Business expansion.
• Buy fixed assets.
• Meet working capital requirements.
• Paying-off rent and salaries.
• Hiring new staff, etc.

Working Capital Loan by Banks

Various banks and financial institutions offer working capital loans to MSMEs and startups to fulfil their daily cash requirements. The applicant can avail these loans to meet their short-term needs for liquid cash. However, these loans cannot be used for investments or the purchase of long-term assets. Business funding is granted for half to one year, and interest rates range from 12%-16% depending on the business’s credit assessment. 

The loan amount may vary from bank to bank. However, small businesses can avail of a minimum loan of Rs.50,000 at a fixed interest rate. The finance received from working capital loan can be used for various purposes, such as:

• Debt payments.
• Buying inventory and raw materials.
• Paying employee wages.
• Managing overhead costs.
• Paying suppliers, etc.

Loan Schemes Offered by Banks for Startups and MSMEs

Financial institutions and banks provide various business loans schemes for MSMEs and startups, apart from working capital and term loans. These loans can be used for several business needs, such as:

• Purchase of inventory and equipment.
• Operating capital (working capital).
• Fund requirement for expansion, etc.

The loan schemes offered by various banks or financial institutions have different terms and conditions applicable and different interest rates. The applicant can find the details of the various business loan schemes provided by the banks for small businesses on the respective banks’ websites. Some of the banks which offer business loans to small businesses are: 

• State Bank of India.
• HDFC Bank.
• ICICI Bank.
• Axis Bank, etc.

Some of the financial institutions which offer business loans to small businesses are: 

• Non-Banking Financing Companies (NBFCs).
• Small Finance Banks (SFBs).
• Regional Rural Banks (RRBs). 
• Micro Finance Institutions.

SIDBI Loans

The Small Industries Development Bank of India (SIDBI) is the primary financial institution for developing, promoting and financing the MSME sector and startups. The SIDBI helps small businesses to acquire funds for growing, marketing, developing and commercialising their technologies and innovative products. The SIDBI provides several schemes and offers various financial services and products to meet various businesses requirements. 

It offers various direct finance loan schemes such as: 

• SIDBI’s Term Loan to Enhance Production Of MSMEs (STEP) Scheme Guidelines.
• SIDBI and Google Partnership for Assistance to Micro Enterprises (SANGAM).
• SIDBI Assistance to Export Oriented MSMEs Under Ubharte Sitaare Programme.
• Assistance to Re-Energize Capital Investments by SMEs (ARISE).
• SIDBI Assistance to Facilitate Emergency Response Against Corona Virus-Plus (SAFE Plus).
• Top Up Loan For Immediate Purposes (TULIP).
• SIDBI-Loan For Purchase of Equipment For Enterprise’s Development Plus (SPEED Plus).
• SIDBI-Loan For Purchase of Equipment For Enterprise’s Development (SPEED).
• Working Capital (Cash Credit).

The SIDBI portal provides eligibility criteria and the features of the direct loans schemes on its portal. The applicant can choose the direct finance loan scheme after going through its features and apply for the selected loan scheme directly on the SIDBI portal. 

National Small Industries Corporation Scheme

The National Small Industries Corporation (NSIC) is a government enterprise that aids the growth of MSMEs and startups by providing various services, including market, technology, finance and other services across the country. The NSIC has initiated the ‘Raw Material Assistance’ scheme to help small businesses. The raw material assistance scheme provides finance for purchasing business raw materials. 

This NSIC scheme facilitates raw material procurement with credit support for up to 180 days. It helps the MSMEs to avail economics of purchases like cash discounts, bulk purchases, etc. The NSIC also provides the ‘Bank Credit Facilitation’ scheme. It helps the MSMEs to meet the credit requirements. The NSIC has entered into a Memorandum of Understanding (MoU) with various nationalised and private sector banks. 

The NSIC facilitates MSMEs to access credit support from these banks, assists them in completing the documentation and follows up with the banks to obtain credit facilities. The applicant can apply for the schemes of the NSIC by visiting the NSIC website, going through the features of the schemes and apply for them.

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