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10 Business Loans For Startups And MSMEs By The Indian Government

10 Business Loans For Startups And MSMEs By The Indian Government

The government has launched a 59-minute loan platform that enables easy access to credit for MSMEs

SIDBI has started lending to companies directly instead of through banks

Changes have been observed in the existing schemes for startups and MSMEs

India today is home to more than 39K startups. The Indian startup ecosystem is producing unicorns at double the speed than before, with multi-billion dollar fundings from global investors, and celebrating high-profile exits such as the $16 Bn Walmart-Flipkart acquisition last year. At the same time, the country’s micro, small, and medium enterprises (MSME) sector comprising 577 Cr companies is beating challenges of setting up and building the consumer base, among others.

But an idea remains an idea if it does not get the requisite working capital on time. According to reports, less than 5% of MSMEs have access to formal credit, while others rely on informal sources to fund their businesses. For Indian startups, while there are a number of private equity and debt funding options available, to get funding at the idea or early stage is a challenge.

In a much-needed move to address this gap, the Indian government has rolled out initiatives to offer business loans for startups and MSMEs through authorised channels. Among the several MSME schemes for entrepreneurs, one of the most important ones was the recently-launched 59-minute loan platform that enables easy access to credit for MSMEs.

Also, the Small Industries Development Bank of India (SIDBI) has started lending to companies directly instead of through banks. These government loans for startups are at least 300 basis points lower than the ones that are offered by banks. SIDBI offers long-term loans of up to five years online.

A number of other government startup loans and schemes for entrepreneurs in India have been introduced in the past few years. Here is a list of some of the most popular and notable government schemes that offer business loans for startups And MSMEs in India.

  1. 42 (End to End Energy Efficiency) – Click to read more ➤
  2. Bank Credit Facilitation Scheme – Click to read more ➤
  3. Credit Guarantee Scheme (CGS) – Click to read more ➤
  4. Credit Linked Capital Subsidy for Technology Upgrades – Click to read more ➤
  5. Coir Udyami Yojana – Click to read more ➤
  6. MSME Business Loans For Startups In 59 Minutes – Click to read more ➤
  7. Pradhan Mantri Mudra Yojana (PMMY) – Click to read more ➤
  8. SIDBI Make in India Soft Loan Fund for MSMEs (SMILE) – Click to read more ➤
  9. Standup India – Click to read more ➤
  10. Sustainable Finance Scheme – Click to read more ➤

4E (End to End Energy Efficiency)

Launched in: September 2016

Headed by: Small Industries Development Bank of India (SIDBI)

Industry: Sector-agnostic

Eligibility: MSME startups in the manufacturing or services sector that have been operating for at least three years and have earned cash profits in the last two years are eligible for the loan. Here are the specific eligibility criteria.

  • The startup should not be in default with any bank/financial institutions
  • It should have undergone a process of detailed energy audit (DEA) through a technical agency/consultant that is a Bureau of Energy Efficiency (BEE)-certified energy auditor
  • The detailed project report (DPR) prepared by the technical agency/consultant should have been vetted by the Energy Efficiency Cell (EEC), SIDBI
  • The unit should not have availed a performance linked grant under the World Bank-Global Environment Facility (WB-GEF) Project for the proposed energy efficiency (EE) Project and should be in compliance with the Environment and Social Management Framework

Overview: This MSME scheme for entrepreneurs has been launched jointly by India SME Technology Services Ltd (ISTSL) in association with World Bank. The main objective is to implement energy efficiency measures across Indian industries on an end-to-end basis. Also, it aims to help startups finance purchases of second-hand machinery/equipment.

The business loans for startups under this scheme meet part costs of:

  • capital expenditure, including for the purchase of equipment/machinery, installation, civil works, commissioning, etc.
  • any other related expenditure required by the unit provided it is not more than 50% of capital expenditure.

Fiscal incentives under the 4E scheme:

  • The MSME startup has to pay only INR 30,000 and applicable taxes and the balance fee will be paid by SIDBI to auditors
  • Up to 90% of the project cost with a minimum loan amount of INR 10 Lakh and a maximum loan amount not exceeding INR 150 Lakh per eligible borrower can be granted under this scheme.
  • Eligible loan amount should not exceed one-fifth of the total turnover of the applicant unit.

Time period: The repayment period, including the initial moratorium period of up to six months, shall not be more than 36 months for loans up to INR 100 Lakh and 60 months for loans beyond INR 100 Lakh.

To know more about this startup scheme by the Indian government, click here.

Bank Credit Facilitation Scheme

Launched in: NA

Headed by: National Small Industries Corporation (NSIC)

Industry: Sector-agnostic

Eligibility: MSMEs registered in India

Overview: The scheme aims to meet the credit requirements of MSME units. The NSIC has entered into a MoU with various nationalised and private sector banks for the purpose. Through syndication with these banks, the NSIC arranges for credit support (fund- or non-fund-based limits) from banks without any cost to MSMEs.

Fiscal incentives: NA

Time period: The repayment period varies depending on the income generated from the startup and generally extends from five to seven years. However, in exceptional cases, it can go up to to 11 years.

To know more about this startup scheme by the Indian government, click here.

Credit Guarantee Scheme (CGS)

Headed by: Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

Industry: Sector-agnostic

Eligibility: The scheme is applicable to new and existing MSMEs engaged in manufacturing or service activities, excluding retail trade, educational institutions, agriculture, self-help groups (SHGs), training institutions, etc.

Overview: The Credit Guarantee Scheme was launched by the government to strengthen the credit delivery system and to facilitate the flow of credit to the MSME sector. The lending institutions under this scheme mainly include public, private, and foreign banks, along with regional rural banks and the SBI and its associate banks.

Fiscal incentives: This MSME scheme for entrepreneurs comes with a number of benefits, including term loans and/or working capital loan facility up to INR 200 Lakh per borrowing unit. Here are some more details of the scheme:

  • The guarantee cover provided is up to 75% of the credit facility up to INR 150 Lakh
  • 85% of credit facility for loans up to INR 5 Lakh is provided to micro-enterprises
  • 80% of credit facility for MSMEs owned/operated by women and all loans to NER including Sikkim
  • For MSME Retail trade, the guarantee cover is 50% of the amount in default subject to a maximum of INR 50 Lakh.

Time period: The credit guarantee will commence from the date of payment of guarantee fee and will run through the agreed tenure of the term credit in case of term loans/composite loans and for a period of five years where working capital facilities alone are extended to borrowers, or for such period as may be specified by the guarantee trust.

To know more about this startup scheme by the Indian government, click here.

Credit Linked Capital Subsidy for Technology Upgrades

Headed by: Office of the Development Commissioner, Ministry of MSMEs

Industry: Sector-agnostic

Eligibility: Existing small-scale industry (SSI) startups registered with the State Directorate of Industries that have upgraded their existing plant and machinery with state-of-the-art technology, with or without expansion, are eligible for this scheme. Also, new SSI units registered with the State Directorate of Industries that use the appropriate, eligible, and proven technology, duly approved by the Governing and Technology Approval Board (GTAB)/Technical Sub­Committee (TSC), will be eligible.

Overview: This business loan for startups aims to facilitate technology upgrades by providing upfront capital subsidies to SSI units, including khadi, village, and coir industrial units, on institutional finance (credit) availed by them for modernisation of their production equipment (plant and machinery) and techniques.

Fiscal incentives: The ceiling on business loans for startups under the scheme has been raised from INR 40 Lakh to INR 1 Cr while the rate of subsidy has been enhanced from 12% to 15%. Here, the admissible capital subsidy is calculated with reference to the purchase price of plant and machinery, instead of the term loan disbursed to the beneficiary unit.

Time period: NA

To know more about this startup scheme by the Indian government, click here.

Coir Udyami Yojana

Headed by: Coir Board

Industry: Agriculture

Eligibility: All coir processing MSME startups registered with the Coir Board under the Coir Industry (Registration) Rules, 2008, are eligible for this scheme. Here is the criteria:

  • Assistance under the scheme will be made available to individuals, companies, self-help groups, NGOs, institutions registered under the Societies Registration Act 1860, production co-operative societies, joint liability groups, and charitable trusts
  • Startups that have already availed of a government subsidy under any other scheme of the Indian government or any state government for the same purpose are not eligible to claim a subsidy.

Overview: The scheme is aimed at supporting the establishment of coir units. Banks will finance capital expenditure in the form of a term loan to meet the working capital requirements in the form of cash credit. Projects can also be financed by the bank in the form of composite loans consisting of capex and working capital.

Fiscal incentives: Banks will support project cost of up to INR 10 Lakh plus one cycle of working capital, which shall not exceed 25% of the project cost. In addition:

  • This should be exclusive of the INR 10 Lakh limit proposed.
  • The amount of credit will be 55% of the total project cost after deducting 40% margin money (subsidy) and the owner’s contribution of 5% from beneficiaries.
  • The subsidy will be computed excluding working capital component.

Time period: Rate of interest chargeable for the business loans for startups shall be at par with the base rate. Repayment schedule may not exceed seven years after an initial moratorium, as may be prescribed by the concerned bank/financial institution.

To know more about this startup scheme by the Indian Government, click here.

MSME Business Loans For Startups In 59 Minutes

Launched in: September 2018

Headed by: Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

Industry: Sector Agnostic

Eligibility: For existing businesses: Borrower should be GST, IT compliant and must have six months bank statement facility. The business loan eligibility is determined by a company’s:

a. Income/ Revenue
b. Repayment capacity
c. Existing credit facilities
d. Any other factors as set by lenders (banks)

Overview: Prime Minister Narendra Modi described this initiative last year while unveiling the 12-point action plan for the MSME sector. The initiative aims at automation of various processes to loan appraisal in such a way that one gets an eligibility letter, in-principle approval in less than 60 minutes and chooses the bank that one may prefer to ease access to credit to smaller and micro enterprises.

Post the in-principle approval, the time taken for business loan disbursement depends on the information and documentation provided on the platform and to the banks. Generally, post the in-principle approval, the loan is expected to be sanction/disbursed in 7-8 working days.

Fiscal Incentives: The contactless business loans for startups are currently provided for value from INR 1 Lakhs Upto INR 1 Cr. The rate of interest starts from 8% onwards.

Time Period: NA

To know more about this startup scheme by the Indian government, click here.

Pradhan Mantri Mudra Yojana (PMMY)

Launched in: 2015

Headed by: Micro Units Development and Refinance Agency Ltd (MUDRA)

Industry: Sector-agnostic

Eligibility: Non–corporate small business segment (NCSB) comprising proprietorship/partnership firms in rural and urban areas can apply for the loan. Here are some examples of NCSBs:

  • small manufacturing units
  • service sector units
  • shopkeepers
  • fruits / vegetable vendors
  • truck operators
  • food-service units
  • repair shops
  • machine operators
  • small industries
  • artisans
  • food processors and others

All kinds of manufacturing, trading and service sector activities can get a MUDRA loan.

Overview: MUDRA provides refinance support to banks/Micro Finance Institutions (MFIs) for lending to micro units that have loan requirements of up to INR 10 Lakh. According to recent media reports, in the financial year 2017-18, overall business loans worth INR 2.54 Lakh Cr were classified as Mudra loans, an increase of 41% from INR 1.80 Lakh Cr loans sanctioned in this category in the last financial year.

For 2018-19, a target of INR 3 Lakh Cr has been set. Interestingly, the non-performing assets (NPA) level under the PMMY was only 5.38% as on March 31, 2018 — almost half of the gross NPAs across all sectors in the country, which crossed 10% in fiscal 2017-18.

Fiscal incentives: MUDRA offers incentives through these interventions:

> Shishu: Loans upto INR 50,000

> Kishor: Loans above INR 50,000 and up to INR 5 Lakh

> Tarun: Loans above INR 5 Lakh and upto INR 10 Lakh

Generally, loans upto INR 10 Lakh issued by banks to MSMEs are given without collateral. Also, within these interventions, MUDRA ensures to meet the requirements of different sectors/business activities as well as business/entrepreneur segments.

Time period: NA

To know more about this startup scheme by the Indian government, click here.

SIDBI Make in India Soft Loan Fund for MSMEs (SMILE)

Launched in: August 2015

Headed by: Small Industries Development Bank of India (SIDBI)

Industry: Sector-agnostic

Eligibility: New enterprises in manufacturing as well as the services sector can apply for this scheme. Existing enterprises undertaking expansion, modernisation, technology upgrades, or other projects for growing their business will also be covered.

Overview: The aim of this scheme is to provide soft loans, in the nature of quasi-equity, and term loans on relatively soft terms to MSMEs to meet the required debt-equity ratio for the establishment of new MSMEs and also to enable the growth for existing ones.

Fiscal incentives:

  • For the general category, 10% of the project cost, subject to a maximum of INR 20 Lakh is provided as the loan amount
  • 15% for the enterprises promoted by Scheduled Caste (SC) /Scheduled Tribe (ST) / Persons with Disabilities (PwD), and women, subject to a maximum of INR 30 Lakh
  • Persons belonging to these categories must own a controlling stake (ie 51% or higher)

Time period: On expiry of three years from the date of the first disbursement, the outstanding soft loan, together with any dues thereon, shall be converted into a secured term loan and the entire loan shall carry an applicable rate of interest as per internal rating of the borrower. The repayment period is generally upto seven years, inclusive of the moratorium up to one-and-a-half years for the term loan and up to two years for a soft loan.

To know more about this startup scheme by the Indian government, click here.

Standup India

Launched in: April 2016

Headed by: Small Industries Development Bank of India (SIDBI)

Industry: Sector-agnostic

Eligibility: Enterprises in trading, manufacturing, or services. In the case of non-individual enterprises, at least 51% of the shareholding and controlling stake should be held by an SC/ST or woman entrepreneur. The borrower should not be in default with any bank or financial institution.

Overview: This scheme by the Indian government facilitates bank loans between INR 10 Lakh and INR 1 Cr to at least one SC or ST borrower and at least one woman borrower per bank branch, for setting up of a greenfield enterprise. So far, 3457 online business loans for startups have been sanctioned through the Standup India platform.

Fiscal incentives:

  • It offers composite loans between INR 10 Lakh and INR 1 Cr to cover 75% of the project, inclusive of the term loan and working capital
  • The stipulation of the loan being expected to cover 75% of the project cost would not apply if the borrower’s contribution along with convergence support from any other schemes exceeds 25% of the project cost
  • The rate of interest would be the lowest applicable rate of the bank for that category (rating category) not to exceed [base rate (MCLR) + 3%+ tenor premium]

Time period: This government business loan for startups is repayable in seven years with a maximum moratorium period of 18 months.

To know more about this startup scheme by the Indian government, click here.

Sustainable Finance Scheme

Headed by: Small Industries Development Bank of India (SIDBI)

Industry: Green energy, non-renewable energy, technology hardware, renewable energy

Eligibility: Renewable energy projects such as solar power plants, wind energy generators, mini hydel power projects, biomass gasifier power plants, etc, for captive/non-captive use (ie, power generated is sold/supplied to the grid/off-grid).

  • Any kind of potential cleaner production (CP) investments including waste management
  • Suitable assistance to original equipment manufacturers (OEMs) which manufacture energy efficient/cleaner production/green machinery/equipment
  • Either the OEM should be an MSME or it should be supplying its products to a substantial number of MSMEs

Overview: The objective of this startup scheme by the government is to assist the entire value chain of energy efficiency (EE)/cleaner production (CP) and sustainable development projects which lead to significant improvements in EE/CP/sustainable development in the MSMEs and which are presently not covered under the existing sustainable financing lines of credits.

Fiscal Incentives: Suitable assistance by way of term loan/working capital to ESCOs implementing EE/CP/Renewable Energy project provided either the ESCO should be an MSME or the unit to which it is offering its services is an MSME. The rate of interest will be applicable on basis of credit rating of MSMEs.

Time period: NA

To know more about this startup scheme by the Indian government, click here.

Since the launch of the Startup India Action Plan and Standup India scheme in January 2016, and the setting up of the Funds of Funds worth INR 10K Cr, more than 50 government schemes for small businesses have been put in place to support early-stage startups in taking off.

These government loans for small-scale industries are a handful of the many initiatives taken by the Indian government to boost the ease of doing business in the country. India ranked 77th in 2018 on the World Bank matrix in ease of doing business.

The government has been working at a macro level to promote entrepreneurship and opening up international startup corridors between India and the world. To this end, the Department of Industrial Policy and Promotion (DIPP) also launched the State Startup Ranking framework, on the basis of which it ranked states on the startup ecosystems, with Gujarat emerging on top of the chart.

At the micro level, the government’s efforts to offer business loans to startups and MSMEs will certainly supplement its larger gameplan and enable more entrepreneurs to turn their ideas into businesses.