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What is MSME and What are the Financing Options Available for Them?

Implementation of the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 has changed the outlook and definition of small scale industries. To understand what is an MSME, you first have to know about the MSMED Act.

Classification under this act is directly relative to the financing options such organisations can utilise, both from government and non-government institutions.

Classification of small businesses under the MSMED Act 2006

The MSMED Act categorises small businesses based on the amount of investment made. The Act classifies enterprises in the following two types:

1- Manufacturing businesses 

These enterprises are defined based on the investments in plant and machinery.

  • Micro – >Rs. 25 Lakh.
  • Small – >Rs. 25 Lakh <Rs. 5 Crore.
  • Medium – >Rs. 5 Crore <Rs. 10 Crore.

Manufacturing companies are those which produce goods as mentioned in Schedule I of the Industries (Development and Regulation) Act, 1951 or engaged in the process of adding value to a final tangible product.

2- Service providers

These enterprises are defined based on the investments on equipment.

  • Micro– Up to Rs. 10 Lakh.
  • Small – Between Rs. 10 Lakh and Rs. 2 Crore.
  • Medium– Between Rs. 2 Crore and Rs. 5 Crore.

Registering under the MSMED Act is not mandatory for small businesses. However, those registered can take advantage of various benefits offered under the Act.

Benefits of MSME registration

1- Subsidies for product licensing

If you know what is an MSME, you will understand that registered companies can receive a subsidy of up to 75% when obtaining licenses for a product based on the national or international standards.

The maximum subsidy for licensing under national standards is Rs. 1.5 Lakh while that for international standards in Rs. 2 Lakh.

2- Purchase preference

Purchase preference is another benefit you may know if you understand know what is an MSME. The Government has reserved the exclusive purchase of 358 items as of now from micro and small enterprises.

3- Price preference  

The Government also provides a price preference of up to 15% on selected products manufactured by both small-scale and large-scale industries.

4- Subsidy for technology upgrades

Under the Credit Linked Capital Subsidy Scheme for Technology Up gradation, registered businesses can avail up to 15% subsidy when implanting state-of-the-art and latest technology in their business. This subsidy is limited to enterprises manufacturing a list of pre-selected 51 products.

5- Priority sector lending 

One of the exceptional benefits of MSME registration is the quick availability of loans from financial institutions.

MSME and SME loans are the ideal financial options for businesses registered under this MSMED Act.

Some of the benefits of an MSME loan include:

1- Rapid processing and approval 

Financial lenders can process and approve these loans within 24 hours making them a superb choice in case of emergencies.

2- Loans of up to Rs. 30 Lakh

MSMEs and SMEs can avail up to Rs. 30 Lakh usable to grow business operations or expand to another region.

3- Limited documents required for application 

Customers only have to provide their KYC documents and proof of business existence (GST registration, RoC registration certificate, partnership deed, etc.) to apply in a MSME loan scheme.

Lenders may also require additional documents like bank account statement of the last month, income tax returns of the previous year, and relevant financial documents (Balance Sheet, Profit & Loss Account Statement, etc.).

4- Minimal eligibility criteria  

There are numerous MSME loan eligibility criteria that you need to fulfil before applying for MSME finance options. You only have to be between the ages of 25 and 55 years with a business that is at least 3 years old to apply.

Every SME needs a solid financial plan and these loans with convenient repayment tenors of 12 to 30 months can help them do precisely the same. Considering the financial assistance is a vital catalyst to the growth of such organisations, there are ample opportunities around to help them achieve their short-term and long-term targets.

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Written by Aditi Ahuja

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