How to choose right business loan for MSME organization

Table of Content

Introduction

Factors to Consider When Choosing an MSME Business Loan

What are the eligibility criteria for MSME loans?

Conclusion

Introduction

MSMEs are the pillars of the Indian economy. They help in employment generation, exports, and industrial growth. However operating an MSME requires continuous investment in capital, infrastructure, machinery, and technology. Most of the time, entrepreneurs require funds to scale up their business. In such a situation, availing a business loan can be an ideal option.

Selecting the appropriate business loan is significant for an MSME as it influences financial security and development. Numerous loan avenues are present in India, with banks, NBFCs, and government initiatives providing loans to MSMEs.

In this article, we will see how to choose an appropriate business loan for an MSME and what eligibility criteria have to be fulfilled to avail of loans.

Also read: The Impact of Interest Rates on Business Loans: Strategies for Mitigation

Factors to Consider When Choosing an MSME Business Loan

1) Loan Amount Requirement: The initial step in selecting an MSME loan is to identify how much capital your MSME requires. Over-borrowing can cause an excessive repayment burden, whereas under-borrowing can fail to meet your business requirements. You must evaluate your financial needs cautiously before taking a loan.

2) The purpose of the Loan: MSME loans can be taken for different purposes, such as day-to-day business growth, equipment purchase, inventory financing, and technology upgradation. Select a loan that fits your specific business requirements.

3) Type of Loan

There are various types of MSME loans:

• Working Capital Business Loans: For investments such as office space rent, or working capital business needs, etc.
• Equipment Financing: For new machinery purchases or to replace worn-out machinery, at times even used for the repair of a machine as well.
• Government Schemes: A few of them are the Pradhan Mantri Mudra Yojana (PMMY), Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE), and Stand-Up India Scheme.

4) Business loan interest rates: It depends on the lender, type of loan, credit score, and loan tenure. Compare rates at various banks and NBFCs and apply accordingly for the best deal. A low rate can reduce your burden of repayment by a considerable margin.

5) Repayment Tenure: The tenor of loans can vary from a few months to years. For shorter tenors, the EMIs are higher but the total interest is less, whereas longer tenors have lower EMIs but more total interest paid. Select the repayment duration based on your financial ability.

Also read: Understanding Collateral Requirements for Business Loans

6) Processing Fees and Other Charges: Many lenders charge processing fees, prepayment charges, Charges on EMI misses, and other hidden costs. Check for these charges before applying for a loan to avoid extra financial burdens.

7) Collateral Requirement: There are loans that come with a requirement of collateral (property, stocks, fixed deposits), while some, such as Mudra Loans and CGTMSE, do not have a collateral requirement. If you have no assets to mortgage, then take unsecured loans.

8) Time and Process for Loan Approval: If you want urgent funds, approach lenders who approve loans fast and have minimal paperwork. Online lenders and NBFCs typically process faster than regular banks.

Let’s look at the Eligibility Criteria for MSME Loans.

To obtain an MSME loan, companies need to fulfill some eligibility criteria. These can differ from lender to lender, but some of the general requirements are:

1) Type of Business: The business has to be an MSME in terms of the MSME Act, 2006.

2) Age of Business and Stability: All major lenders require that the MSME must have at least 1-3 years of business duration with stable income.

3) Turnover: Banks and NBFCs will generally insist on a minimum turnover, which differs based on the size of the loan and the type of loan.

4) Credit Score: A credit score of 650 and above enhances the probability of loan sanction and reduces the rate of interest.

5) Financial Documents:

• Income Tax Returns (ITR) for 2-3 years
• Bank statements
• Profit and Loss statement and balance sheet
• GST registration certificate (if applicable)
• KYC documents (PAN, Aadhaar, etc.)

6) Business Plan: Some lenders request a business plan to know how the loan is going to be utilized and serviced.

7) Collateral (if applicable): If a secured loan is being applied, the MSME owner is required to pledge property, Assets, or any other collateral.

Conclusion

The right selection of business loans is the best way to the growth and success of an MSME. MSMEs must assess their financial needs, shortlist the lenders, check interest rates, and consider repayment terms prior to approaching a lender. Awareness of the eligibility criteria is also necessary in order to enhance the chances of approval of the loan. There are several government schemes that provide financial support to MSMEs, and it is easy to get access to funds without collateral.

Moreover, NBFCs have proven to be a trustworthy source of MSME finance. They provide flexible loan facilities with faster approvals and less documentation than conventional banks. The majority of NBFCs offer tailor-made loan products, thereby becoming the first choice for small businesses that need quick funds. It is, however, essential to compare interest rates and terms before opting for any lender.