Types of MSME Loan: 9 Essential & Powerful Options (2025)

If you run a small or medium enterprise in India, understanding the types of MSME loan available to you can be the difference between struggling with cash flow and scaling your business confidently. The right funding option at the right time can help you upgrade machinery, expand operations, buy raw materials, or even manage seasonal working capital requirements.

Whether you are a manufacturing unit in Howrah, a service provider in Pune, or a trader in Surat, the Indian banking and financial system offers multiple MSME loan schemes—both government-backed and private—that cater to different business needs.

In this guide, we’ll walk through nine major types of MSME loan, their eligibility criteria, benefits, and where to apply—so you can make an informed choice for your enterprise.

What Qualifies as an MSME in India

Before we dive into the loan types, you need to know whether your business qualifies as an MSME. In India, the classification is based on your investment in plant and machinery/equipment and annual turnover. You can check the official Udyam Registration portal for the latest definitions and to register your enterprise.

For example:

• Micro Enterprises – Investment ≤ ₹1 crore, turnover ≤ ₹5 crore

• Small Enterprises – Investment ≤ ₹10 crore, turnover ≤ ₹50 crore

• Medium Enterprises – Investment ≤ ₹50 crore, turnover ≤ ₹250 crore

Once you’re registered on Udyam, you become eligible for a variety of MSME loan schemes from banks, NBFCs, and government agencies like SIDBI.

1.Types of MSME Loan: Working Capital Loan

A working capital loan is designed to fund day-to-day operational expenses—like paying suppliers, covering payroll, or managing seasonal demand.

When it works best:

• Businesses with seasonal sales fluctuations

• Exporters/importers handling bulk orders

• Traders stocking inventory before festive seasons

Typical features:

• Loan amount: ₹50,000 to ₹5 crore

• Tenure: 12 months (renewable)

• Security: May be unsecured for smaller limits

Banks assess your turnover, receivables, and repayment track record before approval. Learn more about working capital finance on the RBI official page.

2. Term Loan (Short & Long Tenor)

A term loan is a lump-sum amount you borrow and repay in fixed EMIs over a set tenure. It’s suitable for large investments like expanding your factory, purchasing land, or upgrading technology.

Types:

• Short-term loan: 12–36 months, often unsecured for smaller ticket sizes

• Long-term loan: Up to 15 years, usually secured by property or assets

Most lenders offer fixed or floating interest rates. You can compare offerings from multiple banks through SIDBI’s loan products.

3. Machinery & Equipment Finance

If you’re in manufacturing or production, machinery finance can help you buy new or second-hand equipment without blocking your working capital.

Benefits:

• Loan covers up to 90% of equipment cost

• Tax benefits under Section 32 of the Income Tax Act

• Collateral may be limited to the machinery itself

This is ideal for MSMEs in textile, food processing, engineering, or auto components.

4. Invoice/Bill Discounting (TReDS)

Through invoice discounting, you can get immediate funds against unpaid invoices from your corporate buyers.

The RBI has introduced the Trade Receivables Discounting System (TReDS) to enable MSMEs to auction invoices to multiple financiers online. This ensures competitive rates and faster payments. You can check RBI’s TReDS guidelines here.

5. Overdraft/Cash Credit (OD/CC)

Overdraft and cash credit limits allow you to withdraw more than your account balance up to a sanctioned limit—only paying interest on the amount utilized.

Ideal for:

• Managing short-term liquidity gaps

• Businesses with cyclical cash inflows

• Traders and wholesalers with fluctuating inventories

Typically, your stock, receivables, or property are pledged as collateral.

6. Trade Finance (Import/Export)

If you’re an exporter or importer, trade finance products such as letter of credit, bank guarantees, and packing credit can help you manage payment cycles and mitigate risks.

For example, a packing credit loan provides pre-shipment finance to buy raw materials for fulfilling an export order.

7. Government-Backed: CGTMSE (Collateral-Free)

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme enables MSMEs to get loans up to ₹2 crore without collateral, backed by a government guarantee.

It’s available through banks and NBFCs, with a nominal guarantee fee. Check the official CGTMSE website for full details.

8. Mudra Loans (Shishu/Kishore/Tarun)

Under the PMMY Mudra Yojana, micro and small businesses can access collateral-free loans up to ₹10 lakh:

• Shishu: Up to ₹50,000

• Kishore: ₹50,001 to ₹5 lakh

• Tarun: ₹5 lakh to ₹10 lakh

These loans are popular with small traders, artisans, and service providers.

9. Stand-Up India (SC/ST & Women Entrepreneurs)

The Stand-Up India Scheme supports greenfield businesses by SC/ST and women entrepreneurs with loans from ₹10 lakh to ₹1 crore. It can be used for manufacturing, services, or trading activities.

Why Choosing the Right MSME Loan Matters

Every business stage has different funding needs. Picking the wrong type of MSME loan can lead to mismatched tenures, higher interest costs, or even cash flow crunches. For example:

• Using a long-term term loan for daily expenses can strain your working capital.

• Taking an overdraft for machinery purchase may cost more than a term loan.

A smart strategy is to mix and match loan products—using working capital loans for operations and term loans for expansion.

Eligibility & Document Checklist

While each lender has specific criteria, most MSME loans require:

• Udyam registration certificate

• GST returns for the last 6–12 months

• ITR for 1–3 years

• Bank statements for 6–12 months

• Proof of business existence (licenses, trade registration)

• KYC documents of owners/partners

Some schemes like CGTMSE waive collateral requirements, while others (like mortgage loans) need security.

Loan Against Property vs Business Loan – Which is Faster?

When it comes to fund disbursement speed, Business Loans often win. Since they are unsecured, lenders like HDFC Bank Business Loan or ICICI Bank can approve them in as little as 48–72 hours if documents are in order.
In contrast, a Loan Against Property (LAP) requires property valuation, legal checks, and verification, which can take 7–15 days depending on the lender.

Example:

• A startup founder needing urgent capital for inventory purchase may choose a Business Loan for speed.

• A manufacturing company planning a long-term capacity expansion might prefer a Loan Against Property for lower EMIs.

💡 Tip: If you want faster LAP approval, maintain clear property titles and updated municipal records. You can read more about the LAP approval process on RBI guidelines here.

Loan Amount Flexibility

One of the biggest distinctions between Loan Against Property vs Business Loan is the loan amount eligibility.

A Loan Against Property can unlock crores of rupees if your property has a high value. This is ideal for big-ticket expansions, real estate investments, or debt consolidation.

✅ Read More: CreditCares Loan Against Property Guide

Risk Factor – Secured vs Unsecured

Here’s the key risk difference:

• Loan Against Property: If you default, the lender can legally auction your property to recover dues.

• Business Loan: No collateral risk, but lenders can take legal action and impact your CIBIL score.

If your business income is unstable, you might want to avoid putting your personal property at risk.

📖 Further Reading: RBI Guidelines on Secured Lending

 Tax Benefits & Financial Planning

While Loan Against Property does not generally offer tax benefits (unless used for home renovation or business expenses), certain cases allow deduction of interest paid under Section 37(1) of the Income Tax Act if the loan is for business purposes.
Business Loans also qualify for tax-deductible interest when used for company operations.

💡 Consult a Chartered Accountant before making tax-related decisions.

📊 Side-by-Side Comparison Table

✅ When to Choose Loan Against Property

Choose a Loan Against Property if:

• You need large funding (₹50 lakh–₹5 crore+).

• You want low interest rates and long tenure.

• You are comfortable pledging property.

• You have time for processing and legal checks.

✅ When to Choose Business Loan

Choose a Business Loan if:

• You need fast approval (within 3 days).

• You have no property to pledge.

• You want short-term funding for 1–5 years.

• You can afford a slightly higher interest rate.

🧠 Expert Insights – Hybrid Strategy

Some business owners combine both loan types:

1. Start with a Business Loan for urgent needs.

2. Later refinance with a Loan Against Property to reduce interest burden.

This way, you get funds quickly while planning a low-cost repayment strategy.

📌 Example:
A textile manufacturer takes a ₹30 lakh Business Loan to buy raw material for an urgent export order, then after 2 months, shifts the debt into a Loan Against Property at 8.5% interest.

❓ FAQs – Loan Against Property vs Business Loan

Q1: Which has lower EMI – Loan Against Property or Business Loan?
Loan Against Property usually has lower EMIs because of lower interest rates and longer tenure.

Q2: Can I use a Loan Against Property for starting a business?
Yes, as long as your lender permits. Many use LAP for new ventures or expansion.

Q3: Does a Business Loan require a CIBIL score?
Yes. Most lenders require a CIBIL score of 700+. (Learn more about CIBIL here).

Q4: Can I prepay my LAP or Business Loan without penalty?
It depends on your lender. Many banks allow prepayment for floating rate loans without penalty, as per RBI guidelines.

📢 Final Verdict – Which Should You Choose?

If affordability and high loan amount are your priorities, Loan Against Property is the winner.
If speed and zero collateral matter more, go for a Business Loan.

💼 At CreditCares, we help you compare Loan Against Property vs Business Loan options from top banks so you make the best financial decision for your needs.