Businesses have several loan options to choose from. Each loan serves a different purpose and has a varying rate of interest and terms. A term loan is one of the most common forms of borrowing for business owners. It has a long tenure and the funds are mostly used to incur capital expenditure in the business. As Micro and small enterprises across the country continue to grow, lenders offer unique loan products for them known as MSME loans. However, they are not the same as standard business loans.
If you are looking to fund the business, there are some differences between an MSME loan and term loans that you must understand. Let’s take a good look at them.
A term loan is available for all business types. There are no criteria with regard to the turnover or profit whereas an MSME loan is available only for micro, small and medium enterprises. You need to meet the investment and turnover criteria to be eligible for the loan.
Purpose of the loan
Term loans are taken by businesses to fund expansion or to meet the capital expenditures. It can be taken for the purpose of growth, diversification, for the purchase of a new asset, to enter a new market, etc. MSME loans are taken to fund the business operations. It can help with managing the day-to-day business activities, purchasing raw materials, etc.
The eligibility criteria for a term loan are more stringent as compared to that of an MSME loan. Lenders will require you to have a decent credit history and the business should be profitable. You must also have experience in running the business. The eligibility criteria for MSME loans are lenient. The loan is offered to fairly new businesses but you still need to have a decent credit score.
Term loans are offered at a low-interest rate as compared to MSME loans.
Term loans are available at a high amount and have a longer repayment tenure. The tenure can go as high as 20 years whereas MSME loans have a short amount and short tenure for repayment.
To get a term loan, you need to provide extensive documentation including a pro forma income statement and balance sheet. You may have to seek the help of a professional to prepare the projected statements. On the other hand, MSME Loans have minimal documentation requirements and are flexible.
A lot of lenders ask for collateral for a term loan and the loan amount will be based on the market value of the asset. On the other hand, MSME loans are usually collateral-free.
Irrespective of the type of loan you choose for your business, remember to compare the loan products and understand their terms and conditions. Even the same type of loan can have varying interest rates and repayment terms. You need to choose a loan product that fits your business needs. Low-interest rates, low processing fees, and quick approval can make a lot of difference to your business. Make a well-informed decision before you sign on the loan documents.