Business loans for small businesses: MUDRA, CGTMSE, PMEGP, OD and TReDS

Small businesses in India can borrow without collateral up to ₹20 lakh under MUDRA and, with a CGTMSE guarantee, much larger amounts through any bank. PMEGP adds a subsidy for new units, Stand-Up India serves women and SC/ST founders, and an overdraft or TReDS discounting solves day-to-day cash gaps. The bank will ask for ITRs, GST returns, bank statements and Udyam proof, so the real work is getting your paperwork in order before you apply.

First decide what kind of money you need

Loans fail when the product does not match the need. There are three distinct needs, and each has a different right answer.

A one-time purchase: a machine, a vehicle, a shop interior, a delivery van. You want a term loan with a fixed EMI over 3 to 7 years, ideally matched to the useful life of the asset.

A permanent working capital gap: you hold stock for 45 days and your customers pay in 60, so you are always short of cash. You want a cash credit or overdraft limit that you draw on and repay continuously, paying interest only on the balance.

A temporary gap on specific invoices: a big customer pays late and you need the money now. Invoice discounting or a TReDS platform advances you the money against that invoice. If late payments are the underlying problem, read our post on the MSME 45-day payment rule first; the law may get you paid faster than a loan will.

Do not fund a machine with an overdraft, and do not fund daily stock with a five-year term loan. Mismatched money is expensive and hard to manage.

MUDRA loans: the four tiers

The Pradhan Mantri MUDRA Yojana (PMMY) is not a lender. It is a scheme under which banks, NBFCs, small finance banks and microfinance institutions give collateral-free loans to non-farm micro enterprises: shops, traders, service providers, small manufacturers, transport operators, food units and the like.

Interest is set by each lender, not by the scheme. Public sector banks typically price Shishu and Kishore loans in the range of about 9 to 12 percent a year and many charge no processing fee on Shishu; NBFCs and MFIs charge more, sometimes well above 20 percent. Repayment tenure is usually up to 5 years for term loans, and working capital limits are renewed annually. Many lenders issue a MUDRA card, a RuPay debit card linked to your working capital limit, so you can draw and repay as needed.

You can apply at any bank branch, through the Jan Samarth portal (jansamarth.in) or Udyami Mitra portal (udyamimitra.in), or through the PSB Loans in 59 Minutes portal for in-principle approval. A Udyam registration is not legally mandatory for MUDRA, but almost every bank asks for it and it costs nothing; see MSME Udyam registration benefits.

CGTMSE: the guarantee that replaces collateral

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) guarantees loans that banks give to micro and small enterprises without collateral or third-party guarantee. If you default, the trust pays the bank a large part of the loss, which is why the bank is willing to lend against your cash flows rather than your house.

Key points as of FY 2026-27:

• Guarantee cover is available on credit facilities up to ₹5 crore per borrower. A further increase in the ceiling was announced in 2025; confirm the current limit on cgtmse.in before you plan around it.
• Coverage is 85 percent of the amount in default for loans up to ₹5 lakh, and 75 percent for larger loans, with higher cover for women-owned enterprises, units in the North East and some other categories.
• The trust charges an Annual Guarantee Fee on the outstanding amount, currently in slabs from roughly 0.37 percent (loans up to ₹10 lakh) to about 1.35 percent (loans between ₹2 crore and ₹5 crore), with concessions for women, micro enterprises and certain regions. The bank pays this and recovers it from you, so treat it as part of your interest cost.
• Both term loans and working capital limits are eligible. Retail trade was brought under CGTMSE in recent years; confirm your activity is eligible.

You do not apply to CGTMSE. You apply to a bank for a collateral-free loan, and the bank obtains the cover. If a branch insists on property collateral for a ₹30 lakh loan to a Udyam-registered manufacturer with clean returns, ask specifically whether they will consider the loan under CGTMSE, and try another bank if the answer is no.

PMEGP: a subsidy, not just a loan

The Prime Minister's Employment Generation Programme (PMEGP) is run by KVIC through banks. It is for new units only; existing businesses and units that have taken subsidy under another government scheme are not eligible. Project cost can go up to ₹50 lakh for manufacturing and ₹20 lakh for service units.

The attraction is the margin money subsidy, which is a grant credited to your loan account after the unit has run for a lock-in period (three years at present):

The balance comes as a bank term loan plus working capital. Apply online at the PMEGP e-portal (kviconline.gov.in/pmegpeportal), with a project report, education proof (Class VIII pass for projects above ₹10 lakh in manufacturing or ₹5 lakh in services), caste or category certificate where applicable, and rural area certificate if claiming the rural rate. Expect a scrutiny interview and a short entrepreneurship training before disbursal. A second loan for expansion, with a smaller subsidy, is available to units that repaid the first loan well.

Stand-Up India and other targeted schemes

Stand-Up India provides composite loans between ₹10 lakh and ₹1 crore to at least one SC or ST borrower and one woman borrower per bank branch, for a greenfield enterprise in manufacturing, services, trading or agri-allied activity. The borrower must hold at least 51 percent of the business. The scheme has been extended more than once, and the Union Budget 2025-26 announced a new term-loan scheme up to ₹2 crore for first-time women and SC/ST entrepreneurs. Check standupmitra.in for the current status before applying.

PM Vishwakarma offers artisans and craftspeople in 18 listed trades collateral-free loans of ₹1 lakh in the first tranche and ₹2 lakh in the second at a concessional 5 percent, along with a toolkit incentive and training. Street vendors can use PM SVANidhi for working capital loans starting at ₹10,000. A Jaipur block-printing artisan or a Kochi street food vendor may find these cheaper than MUDRA.

Bank overdraft and cash credit

Once your business has a year or two of GST returns and bank statements, a working capital limit is usually the most useful product. An overdraft (OD) is a limit on your current account, often secured against a fixed deposit or property, though banks now offer small unsecured ODs to established customers. A cash credit (CC) limit is secured by your stock and receivables. Each month you submit a stock statement, and the bank sets your drawing power, typically 75 percent of the value of paid-for stock plus receivables under 90 days, minus creditors.

Interest is charged only on the daily balance you actually use. This is what makes a limit cheaper than a term loan for a fluctuating need. Limits are reviewed annually, and a bank may cut your limit if your turnover in the account drops, so route your sales receipts through that account. If you sell on credit, keep your receivables list clean; the bank will ask for it, and a tidy customer ledger or ageing statement makes the renewal painless.

Invoice discounting and TReDS

If your customers are large companies, you can sell your unpaid invoices for cash. On a TReDS platform (RXIL, M1xchange, Invoicemart and newer platforms licensed by the RBI), you upload the invoice, your buyer accepts it, and banks and NBFCs bid to finance it. The financier pays you now and collects from the buyer on the due date, without recourse to you if the buyer defaults. Discount rates are typically in the range of 7 to 11 percent a year, but since the money is out for only 30 to 90 days, the actual cost on a ₹5 lakh invoice discounted for 60 days at 9 percent is about ₹7,400.

Companies with turnover above ₹250 crore, and all central public sector enterprises, must onboard TReDS as buyers. If your buyer is not on a platform, banks and fintechs offer bill discounting and invoice financing directly, usually with recourse to you and at higher rates. You need a Udyam registration to sell invoices on TReDS.

What the bank will ask for

Whether you apply for ₹2 lakh or ₹2 crore, the file looks broadly the same.

• Identity and address: PAN and Aadhaar of the proprietor or partners or directors, and of the business; partnership deed, LLP agreement or company incorporation documents where applicable.
• Business proof: Udyam registration, GST registration certificate, Shops and Establishments licence, trade licence, FSSAI or other sector licence. If you are choosing a structure, read proprietorship vs partnership vs LLP vs Pvt Ltd first, because it affects what the bank asks for.
• Financials: income tax returns for the last two or three years with computation, audited or CA-certified balance sheet and profit and loss where available, and projected financials for the loan period.
• GST returns: GSTR-3B for the last 12 months, and often GSTR-1. Banks match declared turnover to your bank credits.
• Bank statements: 6 to 12 months of the current account, and sometimes the proprietor's savings account.
• For a working capital limit: a stock statement, a debtors list with ageing, and a creditors list.
• For a term loan: a quotation or proforma invoice for the machine or vehicle, and proof of your own margin contribution.
• Premises proof: rent agreement or ownership document for the shop or unit.
• Credit score: the bank pulls your CIBIL or other bureau report. For a proprietor it is your personal score; aim for 700 or above. Company borrowers also get a commercial credit rank.

If you have no current account yet, sort that out first; our current account opening guide explains what to prepare.

Interest, fees and the real cost: a worked example

Anand runs an electronics shop in Kochi and wants ₹8,00,000 to stock up before Onam and add a service counter. His bank offers two options: a Tarun term loan at 11 percent for 5 years, or an unsecured OD limit of ₹8,00,000 at 11.5 percent under CGTMSE.

Term loan: EMI on ₹8,00,000 at 11 percent for 60 months works out to about ₹17,395. Total repayment is roughly ₹10,43,700, so interest over five years is about ₹2,43,700. Processing fee at 0.5 percent is ₹4,000 plus GST. In the first year he pays about ₹82,000 in interest.

OD limit: Anand expects to use the full ₹8 lakh for three months around the festival and then run at about ₹3 lakh for the rest of the year. Average utilisation is roughly ₹4,25,000. Interest for the year is about ₹4,25,000 x 11.5 percent = ₹48,900. Add the CGTMSE guarantee fee at 0.37 percent on ₹8 lakh, about ₹2,960, and a processing fee of ₹4,000. First-year cost is about ₹55,900 against ₹86,000 for the term loan, and he keeps flexibility.

For the service counter fit-out, which is a one-time cost of ₹2,00,000, a small term loan is the right fit. So the best structure is a ₹2 lakh term loan plus a ₹6 lakh OD, not one or the other. Run your own numbers on the EMI calculator before you meet the bank.

Comparison at a glance

Red flags of fake loan apps

Unregulated lending apps have ruined many small business owners. The RBI's digital lending rules require every app to name the regulated bank or NBFC behind it and to give you a key fact statement with the rate, fees and tenure. Watch for these signs.

• A fee, "insurance" or "GST" demanded before the loan is disbursed. Genuine lenders deduct fees from the disbursal or bill you afterwards; nobody asks you to pay first.
• The app asks for permission to read your contacts, photos or messages. It has no legitimate need for these; they are collected to harass you and your family later.
• No named lender, no physical address, no grievance officer, or a lender name that does not appear on the RBI's list of registered NBFCs.
• Tenures of 7 to 30 days with "processing charges" that work out to hundreds of percent a year.
• Pressure to decide in minutes, or a loan credited to your account that you never applied for, followed by demands for repayment.
• Requests for your OTP, net banking password or debit card PIN.

If you have been targeted, complain on the RBI's Sachet portal, report the app on the store, and file a police complaint. Do not pay to make threats stop.

Common mistakes

Applying with messy books. A bank sees your GST turnover, your bank credits and your ITR. If the three tell different stories, the file dies. Keep them consistent all year, not just before applying.

Borrowing the maximum on offer. Borrow what the cash flow can repay. An EMI above 30 to 40 percent of your monthly surplus leaves no room for a bad quarter.

Ignoring the effective rate. A flat rate of 9 percent on a reducing balance loan is roughly 16 to 17 percent effective. Ask for the annualised reducing-balance rate and the total cost in rupees.

Letting the CC limit run at 100 percent all year. Banks read this as a stressed borrower and may cut the limit at renewal. It also usually means the limit is doing the job of a term loan.

Missing the annual renewal. Working capital limits expire. A lapsed limit can be reported to the credit bureau even if you never defaulted.

Not claiming subsidy paperwork on time. PMEGP subsidy, interest subvention and state schemes have deadlines and lock-ins. Track them like tax due dates; our small business compliance calendar is a good template.

How VyaparKit helps

VyaparKit is a document and calculator toolkit, not a loan marketplace, but it helps you build the file a bank wants to see. The free EMI calculator shows the monthly outgo and total interest for any loan before you sign. The outstanding statement with ageing gives you the debtors list a bank asks for when setting a cash credit limit, and the customer ledger backs it up transaction by transaction. Recording your purchase bills with the ITC flag keeps your GST report tidy, which is what the bank checks against your bank credits.

Next steps

• Write down what the money is for and pick the matching product: term loan, OD or CC, or invoice discounting.
• Get your Udyam registration, last 12 months of GSTR-3B, 2 years of ITRs and 12 months of bank statements into one folder.
• Check your CIBIL score and clear any small overdue that is dragging it down.
• Ask your bank about MUDRA or CGTMSE cover specifically, and get a second quote from another bank or a small finance bank.
• Run the EMI and total interest before you sign, and confirm the current scheme ceilings and fees on the official portals.