No MSME unit can take off without monetary support. This need for finance can be classified into following types:
- Long and medium term loans
- Short term or working capital requirements
- Risk Capital
- Seed Capital/Marginal Money
- Bridge loans
Financial assistance in India for MSME units is available from a variety of institutions. The important ones are:
- SIDBI: Small Industries Development Bank of India (refinance and direct lending)
- SFCs: State level Financial Corporation e.g. Delhi Financial Corporation.
- NSIC: National Micro, Small and Medium Enterprises.
- Micro, Small and Medium Enterprises of various states.
- Commercial/Co-operative Banks.
- DIC: District Industry Centre.
Long and medium term loans are provided by State Financial Corporations, SIDBI and State Industrial Development Corporations. Banks also finance term loans. This type of financing is needed to fund purchase of land, construction of factory building/shed and for purchase of machinery and equipment. Term loans are secured against mortgage of assets such as land, building, machines, equipment and other stocks. The short-term loans are required for working capital requirements, which fund the purchase of raw material and consumable, payment of wages and other immediate manufacturing and administrative expenses. Such loans are generally available from commercial banks. There is, however, a SINGLE WINDOW SCHEME, for MSME units. Under the scheme, one agency, either the bank or the financial institution, funds both the term loan and working capital requirements. This scheme applies to all MSME projects with project cost upto Rs. 5 million. The working capital loan is generally secured against:
- Pledging of stocks, raw materials and finished goods,
- Advances against work-in-progress (WIP),
- Advance against bills.
For loans from financial institutions and commercial banks a formal application needs to be made. The details of documentation that need to be provided with the loan application are shown here:
- Documentation for Loan Application
- Balance Sheet and Profit Loss Statement for last three consecutive years of firms owned by promoters
- Income Tax Assessment Certificates of Partners/Directors
- Proof of Possession of Land/Building
- Architects estimate for construction cost
- Partnership deed/Memorandum and Articles of Associations of Company.
- Project Report
- Budgetary Quotations of Plant and Machinery
A sanction or rejection letter is issued by bank after its assessment of the application. After receiving a sanction letter applicants need to indicate in writing their acceptance of terms and conditions laid down by FI/ Banks.
Subsequent loan is disbursed according to the phased implementation of the project. In today’s environment there are other choices apart from commercial banks and Government owned financial institutions. These options include venture capital funds and non-government finance companies.