Mudra Loan Vs Business Loan: Which is Better for You? By cioreviewindia Team

Mudra Loan Vs Business Loan: Which is Better for You?

cioreviewindia Team | Friday, 08 January 2021, 06:33 IST

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Mudra Loan Vs Business Loan: Which is Better for You?Starting your business can be tough in an already cut-throat market, factor in the effects of the pandemic and you might as well be driving without a steering wheel. To stay afloat, many small businesses, start-ups and even companies rely on loans to even the playing field. While choosing a loan, you must take into account the interest rates, requirements, and long-term consequences. Mudra loan and a business loan are the usual choices that businesses opt for.

What is a MUDRA loan?

A MUDRA loan is a government initiative. MUDRA stands for Micro Units Development and Refinance Agency Ltd. It offers monetary support to businesses under the Pradhan Mantri MUDRA Yojana (PMMY) program.

The Pradhan Mantri MUDRA Yojana scheme offers three types of loans: Shishu, Kishore, and Tarun. The Shishu loan provides financial aid up to Rs. 50,000/-, the Kishore loan is responsible for providing loans between Rs. 50,000 and Rs. 5 lakhs. The Tarun loan offers aid ranging between Rs. 5 lakhs and Rs. 10 lakhs.

What is a business loan?

A business loan is generally an unsecured financial aid offered by banks and Non-Banking Financial Companies (NBFCs). Also known as commercial loans, a business loan offers two alternatives, Flexi loans and term loans, which allow an average business owner or company optimum chances to choose the loan that is best suited to them. Business loans cater to everyone including but not limited to private companies, start-ups, firms, etc. 

Which loan is a better choice?

So, which loan is better suited to the average businessman/woman? There are several criteria to take into consideration, the foremost of them is the rate of interest, eligibility criteria, repayment tenure, etc.  It would not be a good idea to jump into a business endeavor with a loan scheme that may not be fruitful in the long run or may leave you in debt.  Looking at the following criteria, it becomes easier to figure out the pros and cons of each option.

Rate of Interest

The MUDRA Loan offers on average a starting rate of 8%. The margin cap is 10% for Micro Finance Institutions (MFI) who have a loan portfolio of more than 100 crores and 12 % for smaller MFIs having a loan portfolio that is less than 100 Crore. For NBFCs, the Reserve Bank of India (RBI) has allowed for a 6 % interest cap over and above MUDRA Refinance.

The rate of interest for a business loan is variable, depending on the bank that provides the loan, the type of business, the type of financing, etc. For instance, a businessman can avail themselves a lower rate of interest if they choose a long-term instalment. Similarly, some loans may have a higher rate of interest if the type of business has a certain level of risk to it. For a traditional business loan, banks offer rates of interest on the loan anywhere between 2% to 13%.

Eligibility criteria

To qualify for a loan, certain criteria need to be met. The MUDRA loan under the Pradhan Mantri Mudra Yojana Scheme favours businesses falling in the service sector (such as vendors, traders, and shopkeepers), transport vehicles, equipment finance for micro-units as well as for agriculture allied based businesses such as beekeeping, pisciculture, poultry farming, etc. MUDRA loans are also provided for tractors, tillers, and two-wheelers that are used for commercial purposes.

Business Loans are not so restricting. All that is required for an applicant to be eligible is: the applicant must be between 25 to 50 years of age to apply for the loan. The applicant must own a business that has been up and running for the past three years. Another necessary criterion is that the applicant should have filed Income Tax Returns (ITR) for his/ her business for at least one year.

Documents necessary for applying

To apply for a MUDRA loan, one must have the necessary documents like: 

·         A filled MUDRA application form,

·         2 passport size photographs

·         A business plans

·         Identity proof (Aadhaar card, PAN card, driving license, passport, voter’s ID)

·         Address proof (passport, electricity bill, telephone bill, voter’s ID card, driving license, property papers, rent agreement)

·         Income proof (Income tax returns filed for at least one year, bank account statement for at least 6 months)

·         Age proof (Birth certificate)

·         Proof of belonging

·         Business address and vintage proof

·         Last 6 months bank statement

·         Proof of ownership of office or store

·         Registration, license, and permission

·         Memorandum of Association and Article of Association (for a company )

·         Necessary documents if the applicant belongs to SC, ST, OBC, or any other special category

For a business loan, the applicant does not require so many documents. The applicant needs to only submit the following for a business loan:

·         Identity proof (Aadhaar card, PAN card, driving license, passport, voter’s ID)

·         Address proof (Passport, electricity bill, telephone bill, ration card, trade license certificate, lease agreement, etc.)

·         Financial documents (Income tax returns filed for at least one year, bank account statement for at least 6 months, balance sheet as well as profit and loss statement for 2 months)

·         Business ownership proof

Loan amounts and repayment tenure

A MUDRA loan offers financial assistance of up to Rs. 10 lakhs to banks, Non-Banking Financial Companies (NBFCs), and Micro Finance Institution (MFIs). A MUDRA loan is offered with a period of 5 years for repayment, but the applicant should not be a defaulter to any financial institution.

A business loan offers a maximum of up to Rs. 50 lakhs to an applicant. The amount of the loan also depends on whether the applicant seems trustworthy, has not defaulted on any financial institutions previously, and has a decent credit score. The repayment tenure for a business loan can be between 1 to 5 years.

When looking for a loan, it is comforting to know that one's choices are diverse. However, one must weigh the advantages and disadvantages of each option to make an informed choice. Both MUDRA loans and business loans come with their own set of perks and pitfalls. It is up to the business owner to assess what best suits them.

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