The business sector of India has been in constant flux due to the sheer number of businesses, organizations, companies, and enterprises that there are. New businesses are popping up every day, and all of them are looking for ways to grow and make their mark on the market.
Small and large businesses alike search for different ways to get the necessary funds and financial backing to upgrade and improve their business ventures. Most of the businesses are small, micro, and medium enterprises or MSMEs.
These small businesses can get their desired funding by applying for business loans. These loans are provided by banks and financial institutions and are normally referred to as business loans, or they can be backed by the Government of India like the MUDRA loan scheme.
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What is MUDRA Loan?
MUDRA is an acronym for Micro Units Development and Refinance Agency. This loan scheme was launched by the Government of India that is specifically for individuals and owners of small businesses and MSMEs. The MUDRA loan has:
These different schemes offer different loan amount that can be taken by a small business owner or individual.
Features of MUDRA Loan
- Collateral: Like that of a small business loan, a MUDRA loan under any of the schemes (Shishu, Tarun, Kishore) do not have any collateral associated with it. MUDRA loans are catered towards funding the basis for businessmen to improve and build on their income-generating activities.
- Documents: Being a government-issued scheme, the MUDRA loan requires much more detailed documents for its approval. Businesses need to have all certificates and registrations along with detailed proofs for both the company as a separate entity and the applicant.
- Schemes: MUDRA loan can be availed under three different schemes that entail what types of business can apply for the MUDRA loan and the maximum amount of loan that can be applied for.
Shishu: This loan scheme is for new and smaller businesses that are just starting out. The max loan amount for this scheme is Rs.50000.
Tarun: This scheme is for businesses that have already established themselves as a powerhouse. The Tarun loan scheme is for large businesses who need extra funding to run their daily operation and promotion like partnering with other enterprises and branding. The loan amount ranges from Rs.500001 to Rs.10 lakh.
Kishore: The Kishore loan scheme is targeted towards businesses and enterprises looking to expand their production and service through the purchase of equipment and machinery and other assets like raw materials. The loan amount for this scheme ranges from Rs.50,001 to Rs.5 lakh.
Eligibility Criteria for MUDRA Loan
The eligibility for the MUDRA loan scheme an individual applicant are as follows:
- Age: the minimum age for the applicant is 18 years. The maximum is for application is 65 years.
- Credit: the business for which the MUDRA loan is being availed must have a credit of Rs.10 lakh or lower.
- Non-farming Sector: The MUDRA loan covers offers funding to a wide range of business sectors. Even non-farming businesses with income generation like service, trading, and manufacturing sectors are eligible for the loan.
- Agriculture Sector: Businesses that are allied with the agriculture sector as of April 1St, 2016 can also apply for the MUDRA loan.
Documents for MUDRA Loan Scheme
The documents required to avail a MURA loan are as follows:
- Proof of Identity
- Proof of residence
- Written business plan by the applicant
- KYC documents
- Filled application form for the MUDRA loan under the specified Scheme-Shishu, Kishore or Tarun
- Passport photos of the applicant
- Proof of income.
- Banks statement for at least the past 6 months
- Proof of being a part of an OBC (if applicable)
- Proof of business address
Business registration certificate and other licenses
What are Business Loans?
A business loan is a type of loan that is specifically catered towards meeting business needs. Such loans are the lifeblood of small businesses. A small company or organization and apply for such a business loan at any financial institution and upon being verified, can get the much-needed funding to carry out and boost their business operations.
Features of Business Loan
Business loans have always been the common go-to option for small businesses and enterprises for quick funding. This is because business loans are easily accessible to anyone, and business owners can get the money with relative ease.
- Collateral Free: Business loans are all collateral-free. This means that the business need not sacrifice or deposit any asset with the bank or lending party in exchange for the loan amount. This is especially beneficial for small and new businesses that have little assets that they can put up as loan security.
- Quick processing: Business loans tend to be short term loans that are free of any security deposit. This makes it much faster in processing the loan application. Even after verification of the loan application, the bank or lending institution can quickly process the loan amount and transfer the funds to the bank of the borrower within a few working days.
- Interest rates: Unlike other types of loans, business loans have a fixed rate of interest. This means that regardless of the tenure of the loan, the amount of interest charged will always stay the same during the entire tenure. This makes the calculation of EMI and repayment installments much easier and convenient for the borrowing party.
- Repayment options: Business loans often have a very flexible repayment schedule. Businesses that apply for such loans can choose to repay the loan in periodic installments. This can be in the form of Bi-weekly installments, monthly EMIs, or even quarterly payments as allowed by the lender.
- Documentation: Business loans need little in terms of documents. Banks, NBFCs, and other lending parties need only the basic documents to confirm the legality and authenticity of the business. If all the basic documents are in order, the loan application is approved without any further delay.
Also Read: What is Business Email Compromise (BEC)?
Eligibility criteria for Business Loan
Different financial institutions have different metrics for the eligibility criteria for a business loan. These criteria can differ depending on who the small business approaches for the business loan. The basic and most common eligibility factors are as follows:
- Age: The age of the applicant for the business loan should be between 21 and 65 years. Some lending organizations may have the minimum applicable age as 18 years.
- Business operation: To apply for a business loan, the company/business should have been operational for a period of at least 3 years. This ensures that the business has a long history and provides more trust to the lenders.
- Turnover: Most lenders have business turnover as their eligibility. Businesses should have a minimum of Rs.50 lakh as their annual business turnover. Along with that, the business should be making a minimum profit of Rs.2 lakh. The main reason for this criteria is that lenders may be assured that the business will be able to sustain itself and repay the loan amount without any complications.
- IT: Businesses applying for a loan are expected to provide their complete and filed Income Tax Returns for the past 3 years.
- Credit Score: Having a good credit score with the company bank is crucial for getting approved for a business loan quickly. A good credit score assures lenders that the business has a good reputation with banks and will honour the repayment of the loan on time. Having a credit score above 650 is good and is enough to get a small business loan from any financial institution.
Documents for Business Loan
Like the eligibility criteria, different lenders may require different documents to approve a small business loan:
- Bank account statement for the past 6 months
- Proof of residence
- Income Tax Returns for a minimum of the past 3 years.
- Any Proof of Identity.
- Proof of Business
- Proof of ownership of the business by the applicant
- KYC documents (if any)
MUDRA Loan vs Business Loan
Both business loans and MUDRA loans serve the core principle of providing funds for people and business owners to establish and build income-generation facilities.
The key difference between the two lies in their availability, details, and applicability.
Varies from lender to lender
Changes from bank to bank.
Starts from 8%
12 months to 5 years
3 to 5 years
Max loan amount
Choosing a business loan or a MUDRA loan completely depends on the type of business one owns. Business loans are preferable for a large amount in short periods to get a boost to MSMEs and other small businesses. On the other hand, the MUDRA loan scheme will allow for any business sector to better establish their income generation.
When choosing whether to take a business loan or a MUDRA loan, it is crucial to weigh both options and see which scheme best suits the needs of the business.