SMEs in Kenya: Meaning, Characteristics & Economic Benefits
Compared to larger companies, Small and Medium Enterprises (SMEs) or Micro, Small, and Medium Enterprises (MSMEs) may have particular financial needs. Because of this, banks and other financial institutions provide specialized loans for SMEs and MSMEs with a variety of features, such as:
1. Lower Interest Rates: Compared to regular business loans, SME/MSME loans often have lower interest rates. This is so because the loans are frequently supported by government initiatives designed to support small firms.
2. Collateral-Free Loans: Many banks provide SMEs and MSMEs with collateral-free loans. This indicates that companies can get loans without having to offer any security or collateral.
3. Numerous Repayment Alternatives: There are numerous repayment alternatives available for SME/MSME loans. This can include repayment plans that are adjusted for the cash flow of the company, opportunities for early prepayment without incurring fees, and, if necessary, term extensions.
4. Quick Disbursement: SME/MSME loans are frequently approved fast and delivered in a short amount of time, enabling enterprises to get the money they require right away.
5. Online Application and Approval: Many banks provide online SME/MSME loan application and approval procedures. Small business owners benefit from the ease and time savings of this.
6. Loan Amount: Depending on the demands of the business, SME/MSME loans might range in size from a few thousand to several crores of rupees.
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7. Minimal documentation is needed to apply for SME/MSME loans, which makes it simple for small enterprises to do so.
Overall, SME/MSME loans are made to make it easier for small firms to grow and expand their operations by giving them quick, hassle-free access to capital.
MSME Business Loan Benefits
For Micro, Small, and Medium-Sized Enterprises (MSMEs), obtaining a business loan has a number of advantages. These advantages include:
1. Finance for Business Growth: For MSMEs, access to finance is the main advantage of a business loan. This money can be invested in stock purchases, equipment purchases, or other business expansion strategies. This aids in financing the expansion of the company and increases its profitability.
2. Competitive Interest Rates: In comparison to standard business loans, MSME loans have competitive interest rates that are often cheaper. By lowering the cost of borrowing, small firms will find it simpler to repay their loans.
3. Collateral-Free Loans: Several banks provide MSMEs with collateral-free loans. This makes it simpler for small firms to get financing because businesses can get loans without having to offer any collateral or security.
4. Flexible Repayment Choices: Flexible repayment choices are available with MSME loans. This can include repayment plans that are adjusted for the cash flow of the company, opportunities for early prepayment without incurring fees, and, if necessary, term extensions.
5. Raise Credit Score: Timely and regular repayment of MSME loans can raise the company’s credit rating. This may make it easier to get loans in the future with better terms and lower interest rates.
6. Government Programs and Subsidies: The government provides MSMEs with a number of programs and subsidies. One such program is the loans Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE), which allows MSMEs loans without the need for collateral. These programs and incentives help lower borrowing costs and simplify loan access for small firms.
In general, MSME loans are a helpful tool for small firms that want access to capital to grow their operations or control their cash flow. MSME loans assist small firms in expanding and improving their profitability by offering reduced interest rates, flexible payback schedules, and other advantages.
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How to Apply for an Online MSME Loan
It’s simple to submit an online application for an MSME loan. The steps of applying for an online MSME loan are as follows:
1. Examine the lender: Find out about and contrast the interest rates, loan size, payback length, eligibility requirements, and other terms and conditions that different lenders are offering. Pick a lender that can satisfy your needs as a business.
2. Verify Your Qualification: Verify the requirements for the MSME loan that the lender is offering. This may take into account things like the age of the business, revenue, credit score, and other things.
3. Compile the Necessary Paperwork: A few documents will be needed by the lender to process your loan application. PAN cards, Aadhaar cards, bank statements, income tax returns, and other papers may be among them. Make sure you have all the necessary paperwork on hand.
4. Complete the Application: The majority of lenders offer an online application for MSME loans. Give correct and thorough information when filling out the application.
5. Submit the Application and Supporting Paperwork: Once the application form is finished, send it together with the necessary paperwork. Additionally, there can be a processing charge.
6. Await Approval: The lender will examine your documentation and application. Lender will deposit the loan amount into your bank account if your application is accepted.
7. Pay Back The Loan: After receiving the loan amount, be sure to pay back the loan promptly and in accordance with the terms and circumstances that were agreed upon.
You can apply for an MSME loan online by following these steps and receive the money you require to expand your firm.
Application Eligibility for an MSME Loan
A borrower must satisfy a number of eligibility requirements in order to be considered for an MSME loan. Depending on the lender, the particular requirements could change, but the following are some typical needs:
1. Business Registration: The company needs to be set up as a proprietorship, partnership, limited liability partnership (LLP), private limited company, or any other legal organization permitted by law.
2. Firm Vintage: For the majority of lenders, the firm should be at least two years old; nevertheless, certain lenders might insist on a minimum of three years.
3. Turnover: The company’s annual turnover should fall within the range that the lender has provided. Although it may differ from lender to lender, generally speaking, it falls between Rs. 10 lakhs and Rs. 100 crores.
4. Credit Score: The company should have a high credit score. A credit score of 650 or more is typically regarded as good.
5. Financial Accounts: For the last two to three years, the company should have had audited financial accounts. These financial statements will be used by the lender to evaluate the company’s financial situation.
6. Profitability: For the past two to three years, the company should have been profitable. The lender will choose the loan size and interest rate based on the business’s profitability.
7. Collateral: To secure a loan, some lenders may request collateral or security. However, a lot of lenders also provide MSMEs with loans without collateral.
8. Business Plan: The lender can also want a business plan outlining how the loan proceeds will be used and how they will help the company.
Overall, depending on the lender, the loan size, and other variables, the requirements for an MSME loan may change. Before requesting a loan, it’s crucial to carefully check the lender’s eligibility requirements to make sure you meet all the requirements.
What Distinguishes A SME Loan From An MSME Loan?
Small enterprises are referred to as SMEs (Small and Medium Enterprises) and MSMEs (Micro, Small, and Medium Enterprises). The gap between SME and MSME loans does exist, though.
Businesses with an annual turnover of between Rs. 5 crore and Rs. 250 crores are often eligible for SME loans. To assist small and medium-sized enterprises in meeting their financial needs, these loans are often offered by banks and other financial organizations.
On the other hand, businesses with an annual revenue of less than Rs. 5 crores are eligible for MSME loans. Banks, non-banking financial institutions (NBFIs), and government programs all offer these loans. Micro, small, and medium-sized enterprises (MSME) can obtain money through MSME loans in order to build and expand their businesses.
SME and MSME loans may differ in some ways in terms of loan features. For instance, compared to MSME loans, SME loans may provide larger loan amounts, longer repayment terms, and cheaper interest rates. Compared to MSME loans, SME loans may also need more documentation and have better credit scores.
Overall, SME and MSME loans differ significantly in terms of qualifying requirements, loan amounts, interest rates, and other features, despite sharing some commonalities, such as being aimed toward small enterprises.
What is the APR on a loan for MSMEs?
The lender, the loan amount, the loan term, and the borrower’s creditworthiness are a few of the variables that might affect the interest rates for MSME loans. Here are some common principles for MSME loan interest rates:
1. Government Programs: The government offers a number of programs for MSMEs, such as the loans Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE), which offers MSMEs loans without the need for collateral. These loans are frequently provided at interest rates between 7.5% and 9.5%.
2. Banks and NBFCs: These financial institutions provide MSME loans at attractive interest rates that might range from 9% to 20%. The interest rate may change depending on the borrower’s credit rating, revenue generated by the firm, and other elements.
3. Collateral: Compared to loans with no collateral, MSME loans that demand security or collateral may have cheaper interest rates.
4. Loan Amount: The loan amount may have an impact on the interest rate for MSME loans. Higher loan amounts typically come with cheaper interest rates.
5. Credit Score: Compared to borrowers with low credit scores, people with strong credit ratings could be given lower interest rates.
Overall, depending on the lender and the borrower’s creditworthiness, the interest rates for MSME loans may change. To get the greatest deal, it’s crucial to shop around and compare interest rates and other loan characteristics before deciding on a lender.
What Is The MSME Loan Processing Fee?
Depending on the lender and the loan size, the processing charge for MSME loans can change. Lenders typically charge processing fees to offset the overhead and other expenses related to handling the loan application. Here are some broad rules regarding MSME loan processing fees:
1. Government Programs: Processing fees for MSME loans given through government programs may be reduced or waived.
2. Banks and NBFCs: Between 0.5% and 2% of the loan amount may be charged as a processing fee by banks and non-banking financial institutions (NBFCs). The processing charge may change depending on the loan amount, the loan’s term, and other elements.
3. Collateral: Processing costs for MSME loans that require security or collateral may be lower than for loans with no collateral.
4. Loan Amount: Depending on the loan amount, the processing charge may change. Higher loan amounts typically result in a reduced processing cost.
5. Credit Score: Compared to borrowers with bad credit, those with strong credit may be given lesser processing fees.
Before submitting an application for an MSME loan, it is crucial to check the processing charge and other fees related to the loan. Reading the loan agreement thoroughly and being aware of all the fees related to the loan are essential because some lenders may also impose prepayment penalties or other fees.
New MSME Definition
To give these small firms more flexibility and advantages, the Indian government amended the definition of MSMEs in June 2020. The following is the revised definition of MSMEs:
1. Micro Enterprises: An organization is considered a micro-enterprise if it has a turnover of less than Rs. 5 crore and an investment of less than Rs. 1 crore.
2. Small Enterprises: An organization is considered a small enterprise if its investment is less than Rs. 10 crore and its annual revenue is less than Rs. 50 crore.
3. Medium Enterprises: An organization is considered a medium enterprise if its investment is less than Rs. 50 crore and its annual revenue is less than Rs. 250 crore.
More small enterprises can now qualify as MSMEs and receive government programs and subsidies thanks to the new definition’s higher investment cap. The addition of turnover as a criterion in the new definition is anticipated to help expanding enterprises more.
In addition, the government has launched a number of initiatives to assist MSMEs in the COVID-19 pandemic, including collateral-free loans, credit guarantees, and interest rate subsidies. These actions are intended to provide financial assistance and aid MSMEs in recovering from the pandemic’s effects.