As an MSME entrepreneur or finance professional, one of the most important decisions you’ll ever make is choosing the right type of loan for your business. With so many options available from term loans and working capital to packing credit and bank guarantees — it’s easy to get confused. This blog simplifies it all for you in one place. Let’s decode the various types of MSME loans, both fund-based and non-fund-based and help you decide what fits your business needs best.
What Are Fund-Based Loans?
Fund-based loans involve direct disbursal of funds from the bank to the borrower. These loans are ideal when your business needs actual working capital or investment in assets. Common types include:
• Term Loan: Used for purchasing machinery, property, or for business expansion. Repaid through fixed EMIs.
• Working Capital Loan: Ideal for managing day-to-day operational expenses. Interest is charged only on the amount used.
• Mudra Loan: Part of PMMY scheme. Up to ₹20 lakh for small businesses. No collateral required.
• CGTMSE Loan: Collateral-free loan up to ₹10 crore backed by government guarantee.
• Equipment/Vehicle Loan: Used to purchase specific equipment or commercial vehicles.
• Packing Credit: Pre-shipment finance given to exporters for procurement, manufacturing, or packing of goods.
What Are Non-Fund-Based Loans?
Non-fund-based loans do not involve direct fund transfer. Instead, the bank offers a financial guarantee on behalf of the borrower to third parties. These are ideal for businesses that require credibility and support in trade or contract execution. Common types:
• Bank Guarantee: A financial assurance given by the bank in favor of a third party, typically required in tenders and contracts.
• Letter of Credit (LC): Commonly used in international trade. The bank promises payment to the exporter upon meeting document requirements.
How to Choose the Right MSME Loan?
Choosing the right loan depends on the purpose, size, and nature of your business. Here’s a simple guide:
• Buying Machinery or Fixed Assets: Term Loan
• Managing Daily Expenses: Working Capital / Overdraft
• Starting a New Small Business: Mudra Loan
• No Collateral Available: CGTMSE Loan
• Export-Oriented Manufacturing: Packing Credit + LC
• Applying for Government Contracts: Bank Guarantee
Watch the Full Video Here: [https://youtu.be/26aQQ26aiWE]
Final Thoughts
MSME loans are powerful tools but only if you choose the right one. Now that you understand the difference between fund-based and non-fund-based loans, make informed decisions for your business growth. Have questions? Drop them in the comments or connect with me — I’d love to help!
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