Mudra Loan vs Business Loan: Which is better For You?

Mudra Loan vs Business Loan: Look at the below given statistic to get an exact idea about the scope of business loan growth in India over the past few years. Out of a sample of hundred companies that are incorporated in 2019, more than 95 are micro enterprises. The growth in the number of small businesses is due to the widespread sanction of business loans by financial lenders.

The lion share of institutional credit provided to small micro enterprises come from two major sources. The first one is Government sponsored Mudra Loans and second is business loans sanctioned by institutional banks, non-banking financial corporations and microfinance institutions. Before getting into a detailed comparison between the pros and cons of each type of loan let’s have a brief look as to what each loan is and what are their parameters for eligibility and sanction.

Mudra loan

The Pradhan Mantri Mudra Yojana is a flagship scheme launched by the government of India in 2015 to offer credit facilities for micro and small businesses for the purpose of facilitating income generation activities. The main goal of the mudra loan policy is to enhance the credit facilities to the non-farming and non-corporate sector. Mudra is an acronym for Micro Units Development and Refinance Agency. Under the mudra scheme small enterprises and businesses can avail credit facilities up to a maximum amount of Rs 10 lacs.

Different features of mudra loan

This comes under the category of a working capital term loan. Mudra loan can be deployed for a diverse range of purposes such as:

  • Increase of Manufacturing capacity
  • Expansion and modernization of infrastructure
  • Maintaining adequate levels of working capital
  • Purchase of industrial equipment
  • Machinery renovation of office buildings and business premises

Both start-ups and existing business units are eligible for applying to mudra loans. The main focus group of PM mudra scheme are those businesses which are involved in rural manufacturing, trading and services. Business loans for allied agricultural activities can be applied using mudra scheme.

  • The repayment period of the business loan under mudra scheme ranges between 3 years to 5 years.
  • Mudra loans can be availed by eligible enterprises with the required financial statements duly audited by third-party chartered accountants through the website of Government of India.
  • The margin rate depends on the sub category of loan. Loan margin of mudra scheme lies between the range of 0 to 10% and also depends on the quantum of loan.
  • The processing fee of a mudra loan lies in the median of 0 to 0.5 % of the total quantum of loan depending on the nature of the loan.
  • Mudra loan is one of the amazing financial products instituted by the government of India to infuse an entrepreneurial spirit among the wide masses in the rural and small towns of India.

Different products that can be availed under mudra scheme

Kishore loan

This loan variant of the mudra scheme caters to the credit requirements of those entrepreneurs who want to expand their existing business start a new one. This loan variant is a perfect choice for business owners who are looking for enhanced loan quantum to expand their market presence. The following documents are needed for successful consideration of your application:

  • The balance sheet details comprising of profit and loss statements cash flow statements of the business organisation for last two financial years
  • GST returns and income tax credit sales
  • Bank account statement showing all credits and debits related to the enterprise for the previous 6 months.
  • Projected financials pertaining to the balance sheet of the organisation for the next one year or for the tenure of the proposed loan
  • In case of incorporated companies for joint partnership, then the documents of memorandum of association and articles of association need to be submitted
  • The quantum of sales with realised revenues in the current financial year
  • A techno economic viability document which examines the finer points of the business sustainability is to be submitted

Tarun loan

Already successful businesses working to expand their marketing presence in other sectors of the economy can apply for a mudra loan. The loan Quantum ranges from Rs 5 Lakhs to Rs 10 lacs. For the successful application to Tarun loan the following additional documents are required:

  • Address proof
  • Identity proof
  • SC ST OBC certificate as applicable

The mudra loan scheme small businesses and start-up entrepreneurs can borrow up to a maximum of Rs 10 lacs. Entrepreneurs and already established businesses who are looking for a loan quantum of greater than 10 lacs should broaden their horizons and look for business loans from financial institutions from both public sector and private sector. Depending on the nature of the loan and business, the entrepreneurs are sanctioned up to a maximum of Rs 30 lacs and that too without collateral in maximum of the cases. Business loans are being favourable granted for a majority of applicants. It is already a known fact that business loans can be applied in a convenient and swift way with minimal documentation and faster disbursal.

Mudra loan Yojna

Business loan

Business loans are generally offered by institutional credit providers such as banks and NBFCs. The main objective of offering a business loan is to equip and enable others to realise the fund requirements for business expansion and capital expenditure. One of the most common characteristics of providing a business loan is that liability is assigned on the loan applicant to repay the loan along with the accrued interest as per the contractual obligations.

Traditional banks are the sources of business loans. Due to the growth of the private sector banking services and mushrooming of financial institutions, entrepreneurs and business owners are exposed to lot of credit facilities from different players in the market. It is recommended for business owners to research the various parameters of a business loan and apply from the most trusted financial institution.

Different types of business loans

A term loan is a huge quantum of loan, and the borrower is obligated to repay it in Equated Monthly Instalments after consideration of interest and across specified tenure. Long term loans can be availed by systematic process after furnishing all the necessary documents to banks for private sector financial institutions.

Short term loans

Short term loans are similar to long term loans except in the payment tenure. In a short term loan, the debt needs to be repaid quickly when compared to a long term loan. The payment tenure of a short-term loan falls between the ranges of 3 months to 18 months.

Business line of credit

This is another name for a revolving line of credit which is offered by both online lenders in traditional banks. The differentiating factor in this type of business loan is that the borrower is sanctioned specified limit on which depending on the needs of the business withdrawals can be made. The highlight of this loan variant is that that the borrower needs to pay interest only on the withdrawn amount and not on the total line of credit. This type of loan is useful to tide over the temporary cash inflow and outflow mismatches and offers you crucial funds to make your business stay afloat in times of crisis.

Equipment financing

Procuring equipment for a small business is highly crucial in the future sustainability and profitability of the business organisation. Purchasing the right equipment makes all the difference between smooth running and filing for bankruptcy. Online financial lenders and traditional banks favour equipment financing as this presents a low risk to them. The equipment that is purchased using the business loan can serve the purpose of collateral.

Financing of invoices

When companies or enterprises are in need of swift cash then this credit source is utilised. All businesses face the challenge of unpaid invoices. When the vendors of the business fail to honour the invoices of the business organisation in a timely way it will result in temporary cash mismatches on the balance sheet of the company. To remedy these cash crunches, business organisations can secure invoice financing credit by submitting their outstanding invoices to the financial lender. The terms and conditions of this loan variant stipulate that the borrower or applicant can receive up to 85% of the outstanding invoice amount. In case the business organisation fails to get its invoice repaid by its vendors, then the bank reserves the right to charge a factor fee on the loan account on a weekly basis.

Difference between mudra loan and business loan

Due to the increased proliferation of credit products by both public sector and private sector lenders, the borrowers need to exercise the principle of buyer beware and look at various parameters of taking a loan. Adequate research should go into the different components of a financial lending cycle such as interest rate, collateral eligibility, and criteria for loan repayment, tenure and the incidence of processing charges and prepayment penalties. Before signing the dotted line, the borrowers need to satisfy themselves that they are entering into a financial contract on a sound basis. In doing so, any future complications or misunderstandings between the borrower and the financial institution can be avoided. The following are the main points of difference between a business loans under mudra loan:

Origin

The Mudra scheme has its origin in the Government of India’s policy to ramp up credit facilities to micro and small industries. As a social welfare measure, the mudra loan aims to service the credit needs of the under banked and financially illiterate sections of the society.

Business loans are not a new concept in the Indian financial sector. Their origin can be traced to the earliest to a few decades back when banks accepted collateral and sanctioned business loans. In the present times business loans are offered by both public sector and private sector financial lenders.

Maximum loan amount

Borrowers can avail up to a maximum limit of Rs 10 lacs under the prime minister mudra Yojana subject to the correct submission of financial details of the business. There is no maximum cap set on the business loan and depends on the individual financial lending policies of each institution

Interest rate

Applicants for mudra loan scheme should do an in-depth research on the different interest rates that are applied to the various subcategories of the mudra loan. The base rate for every loan product under the mudra scheme starts from 8%.

It is the discretion of the financial lender to set specified interest rate on a case-to-case basis depending on the loan’s nature and end use of funds. The credit history of the borrower also plays a predominant part in the determination of interest rate for a business loan.

Eligibility criteria

Borrowers who apply for mudra loan have diluted standards for eligibility when compared to business loans. People belonging to the lower rank of the socio-economic category such as vegetable vendors, small item manufacturers, artisans and individuals engaged in agricultural activities are eligible for mudra loan application. However, the business criteria for a business loan follow a strict approach.

  • Income tax returns of the last 2 years with at least Rs 1,50,000
  •  The small business should undergo a minimum capital turnover of Rs 10 lacs
  • The loan applicant should either own the premises of the business or any house.

Documentation

There are minor variations in the documentation requirements between a mudra loan and a business loan.

Documents required for a mudra loan

  • Identity proof certificates such as driving licence Aadhar Card, passport and PAN card
  • Residency proof certificate such as telephone bill, electricity bill, passport, Aadhar card
  • Proof of Identity of establishing the business
  • SSI registration certificate
  • Certificate of clearance from the requisite pollution board
  • In case of partnership, the partnership deed should be submitted
  • In case of company, the articles of association and memorandum of association certificates should be given

Required documents for a business loan

  • PAN card
  • Last two years bank statement indicating cash credits and cash debits
  • Address proof of the business
  • Proof of doing business
  • Income Tax documents indicating the financial health of the business organisation

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