Introduction
Running a small or medium business means constantly needing funds—for inventory, working capital, new machinery, or expanding operations. But the good news is, there are many types of loans available for MSMEs in India. In this blog, we’ll explain different types of MSME loans, their typical uses, interest rates, and industry-specific options, so you can make better financial decisions for your business.
1. Working Capital Loans
These loans are used to manage day-to-day business expenses like salaries, rent, and raw materials. They are usually short-term and unsecured.
- Interest Rate: 10% to 16% per annum
- Best For: Businesses that have seasonal fluctuations in cash flow
- Repayment: Flexible, pay as you go
2. Term Loans
Term loans are used for purchasing machinery, expanding business, or starting a new project. These can be short, medium, or long-term loans.
- Interest Rate: 9% to 15% per annum
- Best For: Long-term investments like new offices, equipment, or product lines
- Repayment: Fixed EMIs over 1 to 7 years or more
3. Equipment and Machinery Loans
These loans are offered to businesses that want to purchase or upgrade their machines and tools. It helps in improving production and efficiency.
- Interest Rate: 8% to 14% per annum
- Best For: Manufacturing, textile, and food processing units
- Repayment: Based on the asset lifespan and income generation
4. Invoice Financing / Bill Discounting
If you’re waiting on customer payments, invoice financing lets you get a loan against yourunpaid invoices.
- Interest Rate: 12% to 18% per annum
- Best For: Traders, wholesalers, and exporters
- Repayment: When the customer pays the invoice, the loan is closed
5. Line of Credit / Overdraft Facility
This is like a credit card for businesses. You get a limit, and you only pay interest on the amount you use.
- Interest Rate: 9% to 14% per annum
- Best For: Businesses with unpredictable cash flows
- Repayment: Flexible, pay as you go
6. Mudra Loans (under PMMY)
These government-backed loans support micro-enterprises under three categories: Shishu (up to ₹50,000), Kishore (₹50,000 to ₹5 lakhs), and Tarun (₹5 to ₹10 lakhs).
- Interest Rate: 8% to 12% per annum (may vary by lender)
- Best For: Startups, small shops, and home-based businesses
- Repayment: Flexible, based on category and business size
7. CGTMSE Loans
Under this government scheme, MSMEs can get loans without collateral. The Credit Guarantee Fund Trust for Micro and Small Enterprises backs these loans.
- Interest Rate: 8.5% to 14% per annum
- Best For: New entrepreneurs with no assets for security
- Repayment: Regular EMIs
8. Industry-Specific Loans
Some lenders offer tailor-made loans for specific industries:
- Agriculture/Agri-processing: For cold storage, transport, etc.
- Textiles: For looms, dyeing, spinning machinery
- Food processing: For packaging and preservation machinery
- Retail: Loans for stocking and working capital
Interest rates and eligibility depend on the nature and scale of the business.
How to Choose the Right Loan
- Check your business need: Working capital, expansion, equipment, etc.
- Look at the repayment ability: Can you manage the EMI every month?
- Compare interest rates and loan tenure
- Check if you need collateral or not
- Consider using a CA or platform like Fundbook to guide you
Conclusion
MSMEs in India have many loan options—from short-term working capital to long-term term loans and special government schemes. Choosing the right one depends on your need, repayment ability, and type of business. A well-informed choice can help you grow your business smoothly. Platforms like Fundbook also assist in matching you with the right lender and loan type based on your profile. The right loan can be the fuel your business needs—make sure you pick it wisely.