Eligibility Criteria for SME (small and medium enterprises) or MSME (micro small and medium enterprises) loans.

Definition Basis Micro Small Medium
Turnover based Less than Rs 5 crore Rs 5 - 20 crore Rs 20 - 200 crore
RBI/ MSMED Act-investment in plant and machinery Less than Rs 25 lakh for mfg. units and less than Rs 10 lakh for services units Less than Rs 5 crore for mfg. units and less than Rs 2 crore for services units Rs 5 - 10 crore for mfg. units and Rs 2-5 crore for services units
Credit requirement based Less than Rs 50 lakh Rs 50 lakh - Rs 5 crore Rs 5 crore - Rs 20 crore
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SME Loan

Leading banks in India have a strong focus on SMEs in India and will be happy to extend a SME loan as:

  • MSME loans extended to micro and small enterprises (not medium enterprises) under MSMED Act qualify for priority sector lending targets (mandatory for banks)
  • SME (small and medium enterprises loans) present a large opportunity with attractive returns and high growth potential for banks


Banks offer various types of business loans targeted at SME customers for managing their working capital and other business funding requirements. These loans are designed keeping in mind various situations in which a MSME may require financing such as to buy machinery and raw material, meet their working capital requirements and/or buy other fixed assets. Banks in India offer various funded and non-funded banking facilities and loans to meet the business requirements of SMEs with respect to credit, banking transactions and taking counter-party transactions. Popular SME products and services offered by the majority of the banks in India:

Working Capital Loan:

Banks offer various fund based and non-fund based working capital facilities to MSME customers to assist them in funding their daily operations. Some of the popular MSME working capital loan products are:

  • Current account with overdraft facility
  • Cash Credit facility
  • Bills Discounting
  • Short Term Unsecured Business Loans
  • Loans under the CGTMSE scheme
  • Guarantees
  • Letter of Credit

Term Loan:

Banks also extend fund based facilities to MSMEs for capacity expansion, capital expenditure and for buying fixed assets. Some of the popular MSME term loan products are:

  • Secured Term Loan
  • Loans for purchasing construction equipment or commercial vehicles

Working Capital Loan

Current Account with Overdraft

You open a current account with your bank to manage your daily banking transactions. You are allowed to withdraw and deposit money from the Current Account as and when funds are available. This allows enterprises to manage their short term working capital requirements on an ongoing basis. Banks also offer an overdraft facility on your current account to allow you to overdraw up to a certain limit and hence help you meet any short term mismatches in your working capital finances

Current account overdraft facility key features

  • Current account is a flexible account that allows limitless transactions. Transactions up to a pre-specified limit are free and additional transactions above the free limit are charged
  • No interest is paid on balances in the current account
  • Minimum balance requirements of the current account are higher than saving account due to higher transaction frequency on the account
  • You can also avail an overdraft facility on your current account which allows you to overdraw up to a specific limit occasionally. You are charged only on the utilized amount and not on the sanctioned amount

Current account overdraft eligibility

  • MSMEs with a turnover of more than Rs 30 lakh to upto Rs 3 crore. Banks may have different internal definitions of MSMEs
  • Business Vintage of minimum of three years

Who should opt for Current Account Facility?

  • You have frequent transactions which mean frequent deposits and withdrawals from your bank account
  • You require regular banking facilities for payments, cash management, processing, etc
  • You want to build a history of your banking transactions which enables you to avail credit on easy terms in the future

Cash Credit Loan

A SME enterprise can avail a cash credit facility with a pre-approved limit to manage its seasonal, urgent and unplanned working capital financing requirements. SMEs are allowed to borrow and repay within a pre-approved limit, thus allowing them to meet short term working capital loan requirements on an ongoing basis. The SMEs can utilize the funds withdrawn for business purposes such as purchasing raw material, power and fuel, buying stocks etc.

Cash Credit facility key features

  • Cash Credit facility is similar to the overdraft facility on a current account. It provides an option to draw balance over & above the balance available in the current account within a pre-approved credit limit
  • Banks ascertain and sanction credit limit eligibility based on an assessment of working capital requirement. The banks analyze the last three years of financial statements to determine the credit limit
  • The SME is allowed to continuously borrow, withdraw and deposit under a cash credit facility thus meeting its working capital financing requirements
  • Short term working capital credit where the limit is sanctioned and renewed on an annual basis

Key Eligibility Criteria for Cash Credit facility

  • MSMEs with a turnover of more than Rs 30 lakh to upto Rs 3 crore. Banks may have different internal definitions of MSMEs
  • Business Vintage of minimum of three years
  • Banks seek stocks of raw materials, work-in-progress and finished goods as collateral for cash credit loans

Why should a MSME opt for Cash Credit Facility?

An overdraft or a cash credit facility is a useful tool for meeting the working capital financing requirements of SMEs as it allows:

  • To hedge against a situation of temporary or seasonal mismatches in cash flow
  • To ensure that no cheques issued by it are returned due to insufficient balance in your current account
  • To minimize their interest cost as they pay interest on only the amount drawn and not on the sanctioned limit and the interest is calculated daily
  • Unlike other loan products which are repaid in installment, there is no fixed installment repayment schedule in a Cash Credit Account and one can repay as and when funds are available

Overdraft Vs Cash Credit

While cash credit and an overdraft limit operate similarly, there are some basic technical differences between the two

Cash Credit Facility Overdraft Facility
Account requirement You will be required to open separate Cash Credit Account with bank to avail CC Facility You can avail overdraft facility on your existing current Account.
Security Current Assets like Inventory & receivable are usually taken as security for allowing CC Facility Cash Equivalent like shares, FD’s Insurance policy are taken as security. The facility can be unsecured for up to a certain amount
Length of Credit Period Limit allowed for a period of 1 year & renewed every year Very Short duration – but can be up to 1 year
Frequency of overdraw Unlimited with free transactions allowed up to a particular number Restricted to a few times
Interest Rate 12 - 19% 14 - 20%

Bills Discounting

If your business runs on credit and bills receivable constitute a significant proportion of your current advances or working capital, then you have the option to discount your bills receivable with banks and release liquidity. Banks typically accept bills drawn by you on your customers and pay you immediately after deducting some commission or discount. The bank presents the Bill to the borrower's customer on the due date of the Bill (End of tenure) and collects the total amount from your customers.

Key Features of Bills discounting

  • The facility is offered for 3 - 6 months depending on the tenor of the bill
  • Rate of discount depends on short term interest rate of banks for SMEs
  • An LTV of 80% is applied to the value of bills discounted
  • SMEs with a minimum three years of business vintage are eligible for the facility
  • Eligibility and interest rate for bills discounting is also based on your creditworthiness and an evaluation of your last three years financial performance
  • Banks also take into consideration the creditworthiness of your debtors (drawee of the bills) and typically prefer discounting bills issued by reputed and large corporate

Types of Bills Discounting

Clean bill discounting – Clean bills discounting is offered on a bill of exchanges issued by creditworthy customers and hence, require no supporting documents in addition to the Bill of Exchanges. Clean Bills Discounting can be availed by MSMEs that supply to large, reputed and creditworthy corporate

Bill discounting against LC – Banks also provide an option of discounting a MSMEs LC backed bills receivables. The discounted trade bills are typically backed by irrevocable Letter of credit, granted by any Commercial Bank of India

Why should a MSME opt for Bill Discounting?

  • Provides instant liquidity and working capital financing against your credit sales
  • You are not required to offer any collateral in the form of fixed assets and stock
  • Attractive rate of interest, if the customer (Drawee) is a large reputed corporate with a strong credit track record
  • Low documentation, quick processing and hassle free loan product

Short Term Unsecured Loans in India

While your day to day working capital financing may be met with the common working capital loans offered by banks such as a cash credit facility or an overdraft, there may be certain occasions where you need short term finance to meet some unplanned expenditure required to grow your business. Banks offer short term unsecured loans to meet your short term finance requirements of up to 1 - 3 years.

Key Features of Unsecured Business Loans

  • Loan amount can range from Rs. 5 lakh – Rs. 1 Crore
  • Banks generally charge floating interest rate of 14% - 22% depending on various factors, such as your creditworthiness & present and future financial stability
  • Generally, the loan tenure is from 1 - 3 years, but some banks offer up to 5 years in selected cases
  • These loans are collateral-free loans and based on an assessment of past credit history, business vintage and financial performance

Eligibility Criteria for Unsecured Business Loans

  • SME with a business track record of past 3 years and Minimum turnover of Rs 25 lakh with a profit of minimum 1 lakh
  • Strong CIBIL report and track record
  • A detailed assessment of credit history, banking code of conduct, business strength, financial performance and management reputation

Why should a SME opt for Unsecured Business Loan?

  • You are unable to or not willing to provide a collateral or security such as property or deposit
  • You need money for a relatively shorter period of time
  • You need the money real fast and with minimal documentation within 3 - 15 days
  • You need flexible eligibility norms based on annual turnover or cash profits as opposed to reported income or profits

CGTMSE scheme

Credit Guarantee Fund Trust for Micro and Small Enterprises scheme has been launched by the Ministry of Micro, Small and Medium Enterprises to guarantee loans extended by commercial banks to micro and small enterprises (MSEs). Under the schemes, existing or new MSEs are eligible to get Collateral free loans up to Rs. 1 Crore backed by a guarantee provided by CGTMSE.

Key Features of CGTMSE scheme

  • Annual Guarantee Fee of 1.5% (0.75% for North Eastern Region including Sikkim).
  • Banks can take charge on assets bought by the loan amount
  • Guarantee coverage is up to 75% of the credit facility up to Rs 50 lakh and is 50% for a credit facility of Rs 50 lakh to 1 crore
  • Credit guarantee cover can be higher at 85% for micro enterprises up to Rs 5 lakh, women oriented enterprises and enterprises belonging to North East region
  • Some of the banks providing loans under CGTMSE Scheme are – SBI, ICICI Bank, HDFC Bank, Axis Bank, etc

Eligibility criteria for CGTMSE scheme

  • Sole Proprietorship Firms, Partnership Firms, Private Limited Companies, Public Limited Companies
  • Manufacturing or service-based micro and small enterprises are eligible excluding Retail traders, educational institutions, training institutions, agriculture & Self Help Groups

Why should a SME opt for CGTMSE Scheme?

  • It allows you to secure a loan without collateral to offer
  • If you are Women, Micro Enterprises or units in North Eastern Region (including Sikkim), then you get a higher guarantee coverage with lower guarantee fees
  • It helps you to borrow at a lower rate of returns compared to that on a secured loan

Bank Guarantee

Larger organizations while entering into a working contract with SMEs look for additional comfort on the financial strength of SMEs and their ability to honor the contracts. To meet this requirement, Banks provide a guarantee on your behalf to third parties like government, quasi-government and corporates. This guarantee is an assurance from the bank to pay a certain sum of money, to the third party (beneficiary), if in case you fail to perform a contract.

Key Features of Bank Guarantee

  • Valid for a specified period and for a specified amount (which might be a certain percentage of the total amount of contract)
  • Security or collateral required by banks for issuing bank guarantee
  • The event under which guarantee can be enforced is also clearly stated

Eligibility criteria for bank guarantee

  • SME with Annual turnover between Rs. 7.5 Cr & Rs. 200 Cr
  • Positive TNW and PAT for 2 years
  • Three years of business vintage
  • Clean Credit history: Not listed in RBI Defaulter's List, CIBIL database
  • Group concerns not listed in RBI / CIBIL / Internal database of the bank

Why should a SME opt for Letter of Bank Guarantee?

  • Increases your creditworthiness –Banks grant you a guarantee after an in-depth analysis of your financials. Hence, a Bank Guarantee certify your business soundness and increases your credibility
  • Helps in achieving third party confidence & smooth business functioning

Letter of Credit

A letter of credit is an assurance by a bank to pay one party on behalf of another party. At your request, the bank will issue a letter of credit to your seller or supplier, guaranteeing payment against the supplies or raw material sold by the vendor to you. The Letter of credit will be honored under instructions of the parties, if the supplier has compiled with the condition regarding quality, quantity, price, date of dispatch, etc.

Letter of Credit is mostly used in international trade. If you are an importer and have to deal with unknown foreign suppliers, then they will require payment assurance for doing a business transaction with you. Banks will help you to procure goods at a cheaper rate and easy terms.

Letter of Credit can also be used in cases when you (SME) are in a business that frequently deals with large corporate. In this case, the Letter of Credit will prove your creditworthiness to the large corporate.

Key Features of Letter of Credit:

  • Globally accepted
  • Can be transferred by the beneficiary
  • A certain amount of fee is charged on the Letter of Credit. The amount of fee depends on the number of factors and is different in different banks
  • There are two types of LC - Revocable & Irrevocable LC
  • Revocable LC – You or your bank can amend or cancel the LC any time without informing the seller (beneficiary). This type of LC does not protect the seller
  • Irrevocable LC – This type of Letter of credit cannot be changed or cancelled without permission from everybody involved

Key Eligibility Criteria for Letter of Credit

  • Positive TNW and PAT for 2 years
  • Three years of business vintage
  • Clean Credit history: Not listed in RBI Defaulter's List, CIBIL database
  • Group concerns not listed in RBI / CIBIL / Internal database of the bank

Why should a MSME opt for Letter of Credit?

  • This helps you to procure goods from the international market at easier & convenient terms
  • You can explore new business opportunities as your risk of default is completely removed

Term Loan

Secured Term Loan

You can avail the Term Loans facility for capacity expansion, capital expenditure, and for buying fixed assets. Banks may create a charge on the fixed assets that are bought by the loan amount. Banks may also require collateral security, for granting a secured term loan. Loans against the collateral of residential, commercial or industrial property are the most popular secured term loans for SMEs.

Key Features of Secured Term Loans

  • Typical loan tenure of 5 - 7 years. Some banks also offer loans of up to 10 years
  • Attractive interest rates of 10 - 12 % due to the secured nature of lending
  • Variable rate of interest
  • Loans available for significantly high ticket sizes of Rs 20 - 30 crore as well
  • Banks also provide an overdraft facility on your secured term loans
  • Flexible repayment options are also available

Key Eligibility Criteria for Secured Term Loan

  • SME with a business track record of past 3 years
  • Positive Turnover growth and PAT for 2 years
  • Strong CIBIL report and track record
  • Detailed assessment of credit history, banking code of conduct, business strength, financial performance and management reputation

Why should a MSME opt for Secured Business Loan?

  • You are looking to take a loan for a relatively long period
  • You want to minimize your interest expenses
  • You have a property which you are willing to provide as collateral
  • Your loan amount requirement is high, and hence, banks will not be willing to take an unsecured risk exposure on this amount

Construction Equipment Loan

If you are an infrastructure or a construction company, you may avail of a Construction Equipment Loan to finance the purchase of construction equipment against the hypothecation of the equipment purchased. Several banks and NBFCs finance a wide range of construction equipment which are manufactured by large reputed firms such as L&T, Komatsu, Caterpillar. A few of the popular equipment that are financed by lenders include excavators, tipper/ dumpers, transit mixers, cranes (Pick N Carry, Heavy Duty, Tower & Derrick), wheel loaders, compactors, road rollers, pavers etc.

Key Features of Construction Equipment Loans

  • LTV of up to 100% of the chassis value of the equipment
  • Eligibility of the borrower based on his income and repayment capacity
  • This loan is typically available for a period of 3 - 5 years
  • Requires a hypothecation/ charge to be created on the purchased equipment in favor of the bank
  • Interest rate in the range of 13% to 16 %, typically fixed rate, depending on the profile and credit assessment of the borrower
  • Ticket size may range from Rs 20 lakh to up to Rs 20 - 25 crore
  • Some lenders may require the borrower to have a co-applicant and/or guarantor for availing a construction equipment loan

Key Eligibility Criteria for Construction Equipment Loan

  • Individuals, Self Proprietorship firm, partnership firms, public and private limited companies with more than 2 - 3 years of business experience
  • Existing owner of construction equipment
  • Applicants using the equipment for self-purpose, mine owners and contractors, plant hires

Commercial Vehicles Loan

SMEs operating as transport operators or in businesses engaged in logistics can explore the option of taking commercial vehicles on loan from banks. Loans for purchase of commercial vehicles are available against the hypothecation of the purchased vehicle. Loans are also available for purchasing used commercial vehicles though the terms of the loan are slightly different from that of the new commercial vehicles. Commercial Vehicle Loans are available for all types of vehicles including Light Commercial Vehicles, Medium Commercial Vehicles and Heavy Commercial Vehicles from all leading manufacturers including Tata Motors, Eicher Motors, Volvo, Mahindra Navistar, MAN, AMW, Mahindra & Mahindra, Swaraj Mazda, Bajaj Tempo, Ashok Leyland, etc.

Key Features of Commercial Vehicle Loans

  • LTV of up to 100% of the chassis value of the equipment
  • Eligibility of the borrower based on his income and repayment capacity
  • This loan is typically available for a period of 3 - 5 years
  • Requires a hypothecation/ charge to be created on the purchased commercial vehicle in favor of the bank
  • Interest rate in the range of 12 - 18% which is typically on a fixed rate of interest
  • Refinance/top-up loans on your owned commercial vehicle can also be availed for investment in businesses
  • Balance Transfer facility on Commercial Vehicles is also available
  • Some banks also offer financing for purchasing used vehicles at interest rates ranging from 12 – 22%

Why should a SME opt for Commercial Vehicle Loan?

  • Customized loan suitable for transport operators and SMEs operating in the logistics industry
  • Large number of banks and NBFCs have a focus on the segment and hence interest rates offered are competitive
  • No need to offer any property or other asset as collateral and detailed income proofs

Business Loan News - Mar 2020
*Terms and conditions apply. Credit at sole discretion of lender subject to credit appraisal, eligibility check, rates, charges and terms. Information displayed is indicative and from collected from public sources. Read More