Business Loan and MSME Loan: 5 Big Differences

Both the loans are needed to cover the needs of the businesses. While business loans are for large-scale businesses with collateral, MSME loans are for small and medium-sized businesses. 

Business or MSME loans are required to fulfill the business’s financial requirements. These loan options are common when a business needs capital. Whether it is for launching new products or expanding the business, the requirement for funds is always in high demand. These loans come with a solution when the businesses meet with difficult impediments. The business loans or MSME loans for new businesses sound identical; to avoid further confusion, here are the definitions of both for clarification.

What is Business Loan?

A business loan is a loan explicitly intended for business. It involves debt creation as is the case with all loans and repayment with additional interest will be made. There are two types of business loans: long-term and short-term business loans. Short-term business loans help in building a good credit score over time.

Fullerton India pledges to its customers that the low-interest business loan can be availed. MSME is also a business loan designed for small and medium businesses.

What is MSME Loan?

MSME stands for micro, small, and medium. MSME loans for a new business can be used for talent acquisition, money collection, inventory set-up, and new branding or marketing strategies. The business types varying from small to medium can select this loan option for a new start-up or funding the new operations.

In Fullerton India, MSME loans are offered to the business for acquiring new machinery, rearranging the inventory, and using money to increase assets and build capital. The interest rate of such a loan varies from 17% to 21%.

Business loans for MSME loans may seem alike; however, they have differences in the process –

  • Differences in Documentation Process:

The main difference is in the documentation process and the interest rate. Business loans, designated for large businesses, ask for more documents like shareholder’s names, financial statements, names of the board of directors, and income tax details. Business loans often come with high-interest rate

 In the MSME loan, the documentation process is flexible because such loans are credited to small to medium businesses. The GST documents, income tax returns, and business-related documents are needed. MSME loan comes as a low-interest business loan

  • Credit Score:

In business loans, lenders check the applicant’s credit score with strict vigilance. The credit score determines the nature of the borrowers and how, in the past, the concerned person has dealt with the payment history. A credit score is a must-have factor for a business loan. Without a decent credit score, the applications would not be approved for the business loan.

On the other hand, MSME loans can be disbursed without checking the credit score, depending on the lenders.

  • Collateral Submission:

Collateral submission is mandatory for the business loan. A business loan is not a small amount. Hence, security is needed. Lenders ask for the secured documents from the borrowers to submit before sanctioning the money.

In the case of an MSME loan, the amount is not that big; hence, the requirement of the collateral is optional as per the terms and conditions of the lenders. Start-ups often find this loan a valuable option because it does not put extra collateral pressure.

  • Sanction Procedure

Business loans often face procedural delays due to the extended documentation and approval process. Hence, the entire process takes longer to complete, and the amount gets sanctioned a bit late. Due diligence by the lending institutions is mandatory for approving a business loan. In MSME loans, the sanction process does not take much time. Lesser documents are needed, and the disbursal process is quicker. As per the new rule by the Indian government, MSME loan amounts need to be transferred within two days of the approval.

  • Disbursal Amount:

Business loans with collateral can be for significant amounts. Amounts like Rs. 50 lakhs can be loaned to the business owners, whereas an MSME loan is not that big.

Bottom Line Fact

Business loans or MSME loans fall in the business category and are required for business growth and acceleration. But the differences in the process are what have been discussed above.

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