Business Loans and Government Schemes for Small Businesses in India: Mudra, PMEGP, CGTMSE and More

Finding the money to start or grow is one of the biggest hurdles for Indian small businesses. The good news is that formal credit is easier to reach than it used to be. MoSPI’s ASUSE 2025 detailed report found that more than 80% of small businesses’ outstanding loans came from institutional sources such as banks and government schemes, rather than moneylenders. Several government schemes exist specifically to make loans cheaper or available without collateral.

This guide explains the main schemes, who they suit and how to apply. Terms change, and banks set their own interest rates, so confirm the current details with your bank or the scheme’s official website before applying.

Key points

• Mudra loans give micro businesses collateral-free loans in four tiers: Shishu (up to ₹50,000), Kishore (up to ₹5 lakh), Tarun (up to ₹10 lakh) and Tarun Plus (up to ₹20 lakh, for borrowers who’ve repaid a Tarun loan).
• PMEGP helps you start a new business with a margin money subsidy of 15% to 35% of project cost, for projects up to ₹50 lakh in manufacturing or ₹20 lakh in services.
• CGTMSE guarantees bank loans to micro and small enterprises so banks can lend without collateral, now up to ₹10 crore.
• Udyam registration makes most schemes easier to access. Get it first; it’s free.
• Prepare a simple project report, clean bank statements and your registrations before you apply.

Pradhan Mantri Mudra Yojana (PMMY)

Mudra loans are for non-farm micro enterprises in manufacturing, trading and services, including activities allied to agriculture, such as dairy and poultry.

Collateral: none required. Where to apply: public and private sector banks, regional rural banks, small finance banks, cooperative banks, NBFCs and microfinance institutions. You can also apply online through the government’s JanSamarth portal. Interest: set by each lender, linked to its benchmark rate.

Mudra loans are the most common starting point for tailors, beauty parlours, kirana stores, repair shops, tiffin services and other small businesses. A clear plan showing how the loan will increase your income matters more than the size of your business.

Prime Minister’s Employment Generation Programme (PMEGP)

PMEGP, run by the Khadi and Village Industries Commission (KVIC), supports new micro enterprises with a subsidy on the project cost.

• Maximum project cost: ₹50 lakh for manufacturing and ₹20 lakh for services or trading.
• Subsidy (margin money):

• Your contribution: 10% of the project cost for general category applicants, 5% for special categories. The bank lends the rest.
• Eligibility: age 18 or above; for projects above ₹10 lakh in manufacturing or ₹5 lakh in services, at least Class VIII pass. Existing businesses that already received a government subsidy aren’t eligible for a new unit under PMEGP.

Apply online on the PMEGP portal. Your application goes through KVIC, the state Khadi board or the District Industries Centre, then to a bank. Most applicants complete short entrepreneurship training before the subsidy is released.

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

CGTMSE isn’t a loan, but it’s what lets banks lend to small businesses without collateral. The trust guarantees a large share of the loan, so if the borrower can’t repay, the bank recovers most of its money from the guarantee.

• Who benefits: new and existing micro and small enterprises in manufacturing, services and retail trade.
• Guarantee limit: raised from ₹5 crore to ₹10 crore per borrower in the Union Budget 2025-26.
• Coverage: a large share of the loan, with higher coverage for micro enterprises, women entrepreneurs and the north-eastern region.
• Cost: an annual guarantee fee, usually a small percentage of the loan, which the bank may pass on to you.

You don’t apply to CGTMSE directly. Ask your bank to cover your loan under the scheme.

Schemes for women and SC/ST entrepreneurs

• Stand-Up India has helped SC/ST and women entrepreneurs set up new (greenfield) enterprises with bank loans of ₹10 lakh to ₹1 crore since 2016. The government announced a revamped version in 2026, so ask your bank for the current terms.
• The Union Budget 2025-26 announced a scheme for 5 lakh first-time women, SC and ST entrepreneurs, with term loans of up to ₹2 crore over five years. Check with your bank or the Ministry of MSME for how to apply.
• Mudra, PMEGP and CGTMSE all offer better terms for women entrepreneurs, such as higher PMEGP subsidies and higher CGTMSE coverage.

See our guide for women entrepreneurs in India.

Other schemes worth knowing

• PM Vishwakarma supports traditional artisans and craftspeople in 18 trades, such as carpenters, tailors, potters and blacksmiths, with training, a toolkit incentive and collateral-free loans at a concessional rate.
• PM SVANidhi offers small working capital loans to street vendors, with larger loans for those who repay on time.
• TReDS platforms let micro and small suppliers sell unpaid invoices from large buyers to financiers, getting paid in days instead of months.
• State schemes: most states run their own subsidies and loans for small businesses, women and particular industries. Ask your District Industries Centre.
• Credit cards for micro enterprises: the Union Budget 2025-26 announced customised credit cards with a ₹5 lakh limit for micro enterprises registered on Udyam. See our guide to business credit cards in India.

How to apply successfully

1. Get registered first. Udyam registration (free) and, if needed, GST registration. See our Udyam guide.
2. Write a simple project report. What you’ll do, who your customers are, what the loan will buy, expected monthly sales and costs, and how you’ll repay. Advanton’s business idea reality check produces a 36-month projection you can use as a starting point.
3. Keep your bank account clean. Put all business income and payments through one current account, ideally for at least six months before applying. UPI payments make this easy.
4. Check your credit score. A good CIBIL score helps. Pay existing loans and credit card bills on time.
5. Apply for what you need, not the maximum. A loan that matches a clear plan is easier to approve and to repay.
6. Keep documents ready: KYC (PAN, Aadhaar), address proof for home and business, registrations, bank statements, income tax returns if you file them, quotations for equipment and your project report.

What goes into a project report

Banks don’t need a long document, but they do need clear answers. A good project report for a small loan fits on a few pages:

1. About you: your name, experience in this kind of work and any training.
2. The business: what you sell, where, to whom, and why customers will choose you over others nearby.
3. What the money is for: equipment, fit-out, stock or working capital, with quotations from suppliers.
4. Project cost and funding: the total cost, your own contribution, the loan amount and any subsidy.
5. Sales and costs: expected monthly sales for the first year (realistically, starting low and growing), materials and other variable costs, rent, wages, electricity and other fixed costs.
6. Repayment: your expected monthly profit and how it covers the loan instalment, with a margin for slow months.
7. Registrations: Udyam, GST if applicable, FSSAI or other licences, and shops and establishments registration.

Use real local figures. MoSPI’s ASUSE surveys give typical value added for small businesses by activity and state, which Advanton’s business idea reality check uses as a benchmark, so you can show the bank your plan is grounded in data.

Choosing the right option

Avoiding loan scams

Be wary of anyone who asks for an upfront fee to "get your Mudra loan approved", or who calls claiming to be from the government. Government schemes don’t charge processing fees through agents. Apply directly at a bank branch, through the scheme’s official portal or JanSamarth.

After you get funding

Track how the money is used and keep records, because banks may check, and future loans depend on how you handle this one. Plan repayments into your monthly cash flow with Advanton’s cash and payroll planner.

And as your business grows, make sure customers can find it: list it free in the India Business Directory.

Frequently asked questions

Do I need collateral for a Mudra loan?
No. Mudra loans are collateral-free, though the bank may ask for a guarantee in some cases.

Can an existing business get PMEGP?
PMEGP is for new units. Existing units may be eligible for a second loan to upgrade under certain conditions; check the PMEGP portal.

What interest rate will I pay?
Rates are set by each lender. Government schemes make loans more available and sometimes cheaper, but they don’t fix one rate for everyone.

Can I apply without GST registration?
Yes, for most schemes if your business isn’t required to register for GST. Udyam registration is still recommended.

How long does approval take?
It varies by bank and scheme, from days for small Mudra loans to several weeks for PMEGP, which involves training and verification.

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Sources

1. Pradhan Mantri MUDRA Yojana
2. KVIC, PMEGP portal
3. Credit Guarantee Fund Trust for Micro and Small Enterprises
4. Stand-Up India
5. Ministry of MSME, Udyam Registration portal
6. MoSPI, Press note on the ASUSE 2025 detailed report (6 May 2026)
7. Reserve Bank of India

Last reviewed November 7, 2026. Startup costs are estimates; check local prices, licensing and tax rules before you commit money.