Micro, small, and medium-sized enterprises are the foundation of the Indian economy and play a major role in enhancing our GDP, employment, and exports. Despite their crucial role, securing timely and sufficient financing is still a major obstacle for many MSMEs. The Indian MSME lending market was valued at about ₹35 trillion as of March 2024, but there is still a prominent credit gap of about ₹28 lakh crore, indicating the enormous unmet potential. MSMEs must be strategic and well-prepared when applying for business loans to close this gap and promote long-term growth.
Tips that MSMEs can follow in navigating the lending landscape: –
1. A Good Grasp of Your Financial Needs and Goals
As a business owner, you must determine the precise amount and purpose of the funding your business needs. A clear goal will help you choose the best loan product and avoid misallocating funds, whether for managing working capital, product launches, equipment upgrades, inventory expansion, or digital transformation.
2. Develop an Appealing Business Plan
Your business plan serves as both your road map and a vital document for lenders. Along with your management team, operational strategies, market analysis, and business model, it should also include realistic financial projections. Lenders are looking for a well-constructed repayment plan and a clear path to profitability. Your professionalism and foresight are demonstrated in this plan, which boosts lender confidence.
3. Maintain a Strong CIBIL Score
Your credit score, especially your CIBIL score, plays a pivotal role in loan approvals and terms. Lenders heavily rely on it to assess your creditworthiness and default risk. A strong CIBIL score (usually above 750) can lead to:
- Higher Approval Chances: It acts as an initial filter for lenders.
- Favorable Interest Rates: Lower risk perception translates to competitive interest rates, significantly impacting your total borrowing cost.
- Higher Loan Amounts and Flexible Tenure: Lenders are more confident in offering larger sums and extended repayment periods.
- Increased Credibility for Unsecured Loans: For businesses without collateral, a good CIBIL score becomes the primary determinant of creditworthiness.
- Quick Processing: High scores often lead to quicker approvals and disbursements.
4. Prepare All Necessary Documents
To streamline your loan application, gather essential documents beforehand, as requirements can vary by lender. Generally, all applicants will need identity proof (PAN, Aadhaar, passport, Voter ID, driver’s license) and address proof (Aadhaar, utility bills, ration card, passport, driver’s license). Business address proof typically includes Udyam Registration, lease agreements, GST registration, or business utility bills. Prepare 3-5 years of ITRs with profit & loss and balance sheets, 6-12 months of bank statements, and GST returns for income proof. Business registration proof may involve partnership deeds, MoA, AoA, sales deeds, and copies of licenses. New businesses or those seeking larger term loans should also have projected financials (balance sheets for the next two years) ready.
6. Assess Loan Options and Terms
It is important to compare the interest rates of various banks and NBFCs, repayment terms, processing fees, hidden charges, and disbursement speeds. Certain lenders provide MSMEs with customized products that have adjustable payback schedules. A careful comparison can result in substantial cost savings and a better financial option for your company.
7. Plan Your Repayment Strategy
Present an understandable and practical repayment schedule. Lenders want to be sure you can afford to repay the loan. Select a repayment period that corresponds with the financial cycles of your company after taking your cash flow projections into account. Avoid missing EMI payments at all costs, as this will negatively affect your credit score and future borrowing capacity.
8. Proactively Address Common Challenges
Many MSMEs face hurdles like limited collateral, which government schemes such as CGTMSE help overcome by offering collateral-free loans. To combat limited financial knowledge, it’s wise to consult financial advisors or bank officials. Building lender trust is crucial and can be achieved through maintaining formal financial records, a strong credit history, and a robust business plan, while fintech solutions are also using AI to better assess risk. Furthermore, investing in digital tools addresses outdated technology, improving operations and lender perception, and adherence to strict regulatory compliance is vital for long-term viability and instilling confidence in lenders.
9. Seek Expert Advice
Don’t hesitate to consult with financial advisors, chartered accountants, or bank officials. Their expertise can provide clarity on eligibility criteria, suitable loan products, and documentation requirements, guiding you toward the most beneficial funding options.
By strategically preparing and understanding the nuances of financial products, MSMEs can confidently navigate the lending landscape. This proactive approach will not only secure vital funding but also pave the way for sustainable growth, transforming challenges into opportunities for a brighter future.