4 Big Differences Between A Business Loan & MSME Loan

There are different funding options available to borrowers like Home Loans, Personal Loans, Vehicle Loans, and Education Loans for specific reasons. Similarly, fintech institutions now offer various types of loans to business owners. In India, MSMEs are growing rapidly and contributing to the GDP big time. To support them with funding, fintech institutions offer Business Loans for MSME owners at affordable rates and flexible tenure. But these loan options differ from Standard Business Loans in terms of documentation, scale, interest rates, eligibility, tenure, disbursal time, etc. So, let’s understand the difference between Business and MSME Loans so that you can choose one which aligns the best with your funding needs.

Business Loan for MSME Owners

Business Loans for MSME are for micro, small or medium enterprises. This loan is ideal for new businesses to get the required funds to run their operations, pay salaries, extend office space, etc. Also, MSME Loans can add more to the working capital, buy inventory or equipment, recruit new talents, pay for legal services, etc.

Standard Business Loans

A standard Business Loan for MSME is provided to all types of businesses, regardless of the scale they are running in. This loan is used for additional funding like

  • New products & services launches
  • Business expansion
  • Equipment or machines purchase for inventory 
  • Recruiting new employees
  • and more.

The enterprise owners can either go for a long-term or a short-term Business Loan based on their funding needs. If you want to furnish a good credit score, short-term Business Loans are ideal.

What are the Differences Between MSME Loans and Standard Business Loans?

1. Eligibility 

For MSMEsStandard Business Loans
Business Loans for MSMEs have lenient criteria as these finances are offered to small and new enterprises. But the applicant still needs to have a good credit score. Business Loan documents required for MSME owners are generally pretty straightforward.  Eligibility requirements for a Standard Business Loan are not easy as MSME loans. The fintech institution offering you the loan would like to make sure that you have a good credit history and a reasonable experience in the business. Ensure your business must be in a profitable status for consecutive years if you want to qualify for the loan.

2. Loan Tenure, Amount, and Interest Rate

For MSMEsStandard Business Loans
The amount and tenure offered on Business Loans for MSMEs are lesser than that of Standard Business Loans. But top fintech institutions like Poonawalla Fincorp provide flexible repayment tenure. These loans are provided at higher rates of interest than that of Standard Business Loans since underwriting is not as elaborate and strict as Standard Business Loans.Standard Business Loans offer larger amounts with longer repayment periods. The loan amount is returned over a high repayment term of three years. This allows businesses to have sufficient time to repay the loan. The interest rates on Business Loans are less than on MSME loans since the risk assessment is thorough.

3. Documentation

For MSMEsStandard Business Loans
When it comes to Business Loans for MSME loans, fintech institutions know that small enterprises aren’t always able to submit various documents. Hence, only minimum and vital documents are necessary to secure MSME loans,IT returnsGST detailsBusiness-related account statementsKYC documentsMost fintech institutions provide Business Loans for MSME only to enterprises running for a minimum of 3 years with an audited turnover of ₹20 Lakh along with the necessary documents. Basic KYC documents Financial documents Business Address Proof 

4. Collateral and Disbursal time

For MSMEsStandard Business Loans
Business Loans for MSMEs are unsecured loans that don’t require collateral or security. These loans are provided to encourage small enterprises to thrive and expand.Disbursement time is significantly less here compared to that of Standard Business Loans.Standard Business Loan amounts are large and approved after the fintech provider has secured a loan amount equivalent to the valued collateral.Since Standard Business Loans are disbursed after a thorough risk assessment, the disbursal time taken is longer.

Based on the differences discussed above, Business Loans for MSMEs seem to be a bit easier to secure than Standard Business Loans, making them the better option during emergencies and tasks that require small to medium-range funding.

Adil Memon

Hello, my name is Adil Memon and I am a blogger. I enjoy writing about technology and fashion topics. When I'm not blogging, I can be found playing cricket or spending time with my family.

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