Key Difference Between Business Loan and MSME Loan


Every business needs a regular cash flow to keep the processes up and running without any interruption. However, it is vital to know which kind of loan is best suited for your organisation and help realise your full potential. While there are numerous avenues to borrow money nowadays, opting for business loans still seems to be an ideal solution for maintaining a steady inflow of money.

Depending upon the business loan requirements and your capacity to repay the loan amount, one can choose from a business loan or an MSME loan (Micro, Small, and Medium Enterprises). Opting for the correct type of loan requires understanding various factors such as the loan repayment period, rate of interest, and eligibility criteria. Additionally, one should also be aware of the disbursal time and documentation process related to each type of loan for making a sound decision which shall save your time, energy, and money at all costs. Scroll down to know about the critical differences between a business loan and an MSME loan.

Critical Differences Between A Business Loan And An Msme Loan

  • Purpose of the loan

The primary objective of a business loan is to scale the organisation and help in business growth and expansion strategies. The business loans can be used for any purpose, such as paying off the business-related debts, purchasing machinery, increasing inventories, paying salaries, etc.

However, MSME loans are specifically used for operational purposes such as buying equipment, paying the rent and salaries, and supply purchases but not for clearing previous business debts.

  • Eligibility

In the case of a business loan, the eligibility factors such as credit rating, revenue margins, and considerable experience to run a business play a key role in ensuring the lender regarding the repayment of the loan.

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Comparatively, the eligibility conditions for MSME loans are much more relaxed. While the credit score still needs to be suitable for approval, other factors such as profit margins and business experience are not paid much attention to while sanctioning the loan.

  • Loan Amount and Repayment Period

The loan amount for a business loan is relatively high and usually ranges between INR 1- 5 crores. Along with it, the repayment tenure provided to the established companies for business loans is five years.

In the case of MSME loans, the loan amount offered by the lenders does not go beyond INR 50 lakhs without any collateral. An unsecured form of credit, MSME loans have a repayment tenure ranging between 12 and 60 months for an entrepreneur.

  • Loan Interest Rate

For a business loan, the interest rates offered by the financial institutions are generally on the lower side as it is a secured form of loan having a low-risk factor.

In the case of MSME loans, the interest rate ranges from 17% to 21% based on several parameters such as the industry type, nature of business, number of years in existence, financial stability, previous years’ profit statements, etc.

  • Documentation

In terms of paperwork, the business loans have many documents to present to the lenders, such as financial statements, income tax returns, directors and partners list, profit margin statements, deeds of any property owned by the business, etc.

Compared to business loans, there is a lot less documentation process in the MSME loans, although there is a higher chance of the loan application being rejected. Key documents to be provided for an MSME loan include valid address proof, identity proof, financial statements, statements, income proof, and proof of business existence.

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  • Loan Disbursal Time

In the case of a business loan, the lender may take a considerable amount of time to disburse the loan amount as every document is examined intricately before the clearance. For getting a significant loan amount sanctioned, the owners may have to pay a visit or two to the financial institution before reaching the final stamp of approval. Compared to business loans, MSME loans take much less time to be disbursed because the government has made it compulsory to deposit the required funds in the borrower’s amount within a few days of approval.

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