The Indian MSME (Micro, Small and Medium Enterprises) sector is on the rise. From the last count, India is home to 42.50 million MSMEs that constitute 95% of the total industrial units, employ 40% of the entire workforce, and contribute 6.11% towards the country’s manufacturing GDP. Off all the growth drivers for the MSME sector, loaning is perhaps the most prominent.

Mudra loans and business loans stand out among all loaning options available for the micro and small businesses. Both these lines of credit are readily available for MSMEs, but the real deal is to choose the right one suiting your business requirements. Let’s help you with that.   

Business Loan Defined:

A business loan is a borrowing-lending arrangement between a business and a NBFC. The company is free to raise capital for any business requirement through a business loan. Business expansion, raising working capital, technology upgrade, existing loan repayment, or buying inventory, supplies, equipment or machinery, you name it. The business is contractually bound to repay the loan in full, including principal and interest within the agreed time frame. 

Mudra Loan Defined:

Mudra (M-U-D-R-A) stands for Micro Units Development and Refinance Agency Ltd. The loan scheme, unleashed under the Pradhan Mantri Mudra Yojana (PMMY), aims to support business set up, expansion and operational needs of MSMEs. The Mudra loan is fully government-backed and comes in three variants, namely SHISHU, KISHOR, and TARUN for different requirements.    

How do they differ

Both Mudra loan and business loan help raise funds quickly and efficiently to meet new business needs. They have so much in common, yet they couldn’t be more different at the same time. Let’s put them against each other on key parameters to help you to wise choices.

  • Interest Rates

The interest rate determines the overall cost of borrowing. Higher interest rates mean higher cost of borrowing and higher EMI. It’s, thus, critical to judge a loan on the interest rate it entails.  

The Mudra loan interest rate is NBFC-specific, meaning it varies from one NBFC to the other. Specifications may vary, but a typical Mudra loan carries an interest rate of 8% or above. On the other hand, bank business loans come with heftier interest rates starting from 12%. However, you can fetch highly competitive interest rates with NBFCs like Fullerton India. Just access the business loan EMI calculator to know the interest rates and EMIs involved in business loan. 

  • Collateral-free

Lenders require collateral from the borrower to cover the risk of non-payment. Small businesses and startups often lack an asset to pledge. Many even shy away from pledging an asset for fear of losing it. That makes loaning just a distant dream for most Indian MSMEs. 

The Mudra loans come without the collateral requirement. Conversely, NBFC require collateral to sanction business loans, but NBFCs don’t put any such rigorous conditions. That means you readily get a business loan from an NBFC without having to hypothecate an asset.

  • Eligibility

When it comes to loaning, it all boils down to eligibility. You get the required funds only if you fulfil the eligibility criteria. Business loans have the edge over Mudra loans in this regard.  

The Mudra loans are meant only for a select few, including artisans, shopkeepers, traders, vendors, micro-units, agriculturists and those engaged in related activities and businesses in the service sector. Conversely, a business loan is virtually all-encompassing, meaning it’s available for any business, big or small. Plus, the eligibility is easy. Here’s what the lender will look into.   

  • The age of your business (at least two years) 
  • Last year’s Income Tax Return (at least INR 1.5 lakhs) 
  • Annual earnings (at least INR 5 lakhs)  
  • Business and residential premises be separate 
  • Self-owned house or business place  
  • Documents

The documentation requirements need to be met for a loan for a business. Again, the documentation requirements are loan-specific. Here too, business loan takes the cake.  

For a Mudra loan

  • Two passport photos 
  • Identity proof: Any of a valid DL, Passport, Pan Card, Voter ID card, Aadhaar card
  • Residence proof: Any of utility bills, voter ID card, Aadhaar card, Pan Card, Passport
  • If the loan amount exceeds INR 2 lakhs, the previous two years’ audited balance sheet 
  • If a company, Memorandum of Association and Articles of Association
  • If rented, the business premise’s rental agreement
  • If a partnership business, a partnership deed
  • Business ID and address proof 
  • SSI registration certificate 
  • Pollution board certificate    

For a business Loan

  • PAN card
  • Past two years’ Income Tax returns 
  • Business and address proof
  • Past 9 months’ bank statement