Differences between Mudra Loan and Business Loan

Mudra Loan Vs Business Loan

Check the comparison between mudra loan and business loan

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Loans from financial institutions have long been the go to choice for business to fulfil their capital requirements. In India, there are two different kinds of loans that businesses can opt for - a traditional business loan or a MUDRA loan. 

 

It is important to know the difference between a MUDRA loan vs a business loan as it can help you make the right financial decision for your business. Here’s a more in depth comparison of both of these funding options.

MUDRA Loan Vs Business Loan  - A Comparison

Here is the table that will help you to understand the key differences between MUDRA Loan vs Business Loan.

 

MUDRA Loan

Business Loan

Meaning

MUDRA is an acronym that stands for Micro Units Development & Refinance Agency Ltd. It was established to assist small company owners in growing their businesses by providing loans.

This loan can be obtained from any financial institution to expand an existing business, start a new one, purchase new tools and types of machinery or clear outstanding business dues.

Origin

This scheme was introduced by the Indian government.

Business Loans are provided by different banking institutions and NBFCs.

Maximum Loan Amount

You can get up to ₹10 Lakhs

The maximum amount varies across lenders.

Interest Rate

The starting interest rate is 8%.

The rate of interest for a Business Loan is different from lender to lender.

Mode of Applying

You can apply for this loan through online mode or by visiting any financial institution’s branch.

You may apply for this loan online or in person at any financial institution's branch.

Collateral

No collateral is required

Collateral is required

Different Loans that Can be Availed Under MUDRA Scheme

The MUDRA loan scheme introduced by the government of India can be subcategorised into multiple products - Shishu, Kishor and Tarun. Each of these three products are designed to fulfil the funding requirements of different businesses. Let’s take a quick look at what these products are and their objectives. 

  • Shishu

Designed for micro businesses that require small amounts of funds to kick start their operations, the Shishu loan under the MUDRA scheme offers a loan of up to ₹50,000. 

  • Kishor

The Kishor loan has been designed with the needs of small businesses in mind and provides loans ranging from ₹50,001 to ₹5,00,000. 

  • Tarun

Under the Tarun loan, established medium-sized businesses can borrow funds ranging from ₹5,00,001 to ₹10,00,000 for expanding their business. 

Different Types of Business Loans

As with the MUDRA loan scheme, there are multiple kinds of business loans that you can opt for. Getting to know what they are can help you spot the differences between a MUDRA loan vs a business loan. 

  • Traditional Loans 

A traditional loan is the most popular way through which businesses gain access to funds. These loans can either be short-term, which has a tenure of up to 18 months, or long-term, which has a tenure of more than 18 months. 

  • Equipment Financing 

Businesses that require funds to purchase equipment and machinery often look towards equipment financing. Through this method, a financial institution grants a loan to a business against the equipment that it seeks to purchase. The equipment is held as a collateral for the loan, with the lender getting the right to sell it to recover unpaid dues. 

  • Line of Credit (LC)

A line of credit is a type of revolving credit that’s typically offered to businesses. Here, the financial institution sets a certain borrowing limit up to which a business can use up as and when it needs funds. 

As you can see, an LC works in a very similar manner to a credit card. One of the major advantages of a line of credit for businesses is that the interest has to be paid only on the amount borrowed by them instead of on the entire borrowing limit. 

  • Invoice Financing 

Businesses that require quick access to funds to satisfy their working capital requirements usually opt for invoice financing. Here, financial institutions grant loans against the outstanding unpaid invoices raised by the businesses. When the invoiced amounts are finally paid to the businesses by their customers, the same is taken over by the financial institution. Usually lenders who are into invoice financing offer loans of up to 85% of the invoiced amount.  

Comparison of Eligibility Criteria for MUDRA Loan & Business Loan

The eligibility criteria for both loans are different. Below are the details about the same.

MUDRA Loan

  • The minimum age of the applicant must be 18 and the maximum should be 65 years.

  • Only small/micro-firms such as fruit and vegetable vendors, artisans, shopkeepers, beauty salons, tailoring shops, courier services, boutiques, etc are eligible to apply for mudra loan.

Business Loan

  • The minimum age of the applicant must be 21 and the maximum should be 65 years.

  • Any business can apply for this loan.

  • Business vintage (minimum two years).

  • ITR of last year should be a minimum of ₹1.5 Lakhs.

  • The company’s annual turnover must be more than ₹10 Lakhs.

  • The home and the workplace should be distinct.

  • The proprietor of the business should own either a residence or the business site.

The eligibility criteria of a Business Loan may vary from lender to lender.

Comparison of Documents Required for MUDRA Loan & Business Loan

Here is the list of required documents for MUDRA and Business Loans.

MUDRA Loan

  • Identity proof (Aadhaar card, PAN card, Voter Id card, Passport, Bank passbook, driving licence)

  • Address proof (Aadhaar card, Passport, Voter Id card, Utility bills)

  • Income proof (Bank account statements from the previous six months, income tax returns/sales tax returns, balance sheets from the previous three years audited by CA, and forecasted balance sheets for the upcoming two years)

  • Caste certificate (if you belong to a reserved caste)

  • Business address proof (Business registration certificate, documents containing the business's owners' information and address)

  • Rental agreement (if it is established on a rented property)

  • Partnership contract (if you have any partner)

  • Memorandum and articles of association (if the business is a corporation)

  • Title agreement

  • Lease deed

  • Inventory purchase certificate (if you are taking out the loan to expand your firm)

  • Passport size photographs

  • Small scale industry registration (SSI) certificate

  • Clearance certificate from pollution board

Business Loan

  • Identity proof (Aadhaar card, Voter Id card, Passport, Bank passbook, driving licence)

  • Address proof (Aadhaar card, Passport, Voter Id card, Utility bills)

  • PAN card

  • Age proof

  • Business residence proof (Business registration certificate, documents containing the business's owners' information and address)

  • Bank statement for past six months

  • ITS for last two years

  • Balance sheets for last two years audited by CA

  • Passport size photographs

Both loan types have their own set of advantages, eligibility criteria, and documentation. With the assistance of the above comparison, you now know the differences between MUDRA Loan and Business Loan. As a result, it will assist you in making an informed selection and selecting the best alternative for your needs.