Factors to Consider Before Applying for An MSME Loan

Factors to Consider Before Applying for An MSME Loan.Many recent government policies have prioritized the development of the MSME sector, terming it one of the most critical sectors of the Indian economy. This is evident by this sector’s contribution to the manufacturing and services GDP at 6.11% and 24.63%, respectively.

For individuals wondering about the increased focus on this sector, the MSME sector instills entrepreneurship qualities while generating job opportunities at a lower capital cost. Hence, recent economic reforms have facilitated the approval of a MSME loan scheme from financial institutions across the country.

However, business owners looking to secure an MSME loan should also consider the recent ‘Atmanirbhar Bharat Abhiyan’ definition, which redefines the sector by classifying these enterprises based on investment and annual turnover.

MSME full form and definition according to recent reforms

MSME full form stands for Micro, Small, and Medium Enterprises, a sector that employs about 120 million people across the country. However, amid the recent economic instability, this sector was also among the worst-hit ones, which prompted the Union Government to revise each enterprise’s definition.

So, mentioned below, in brief, are the new definitions of different MSME units in India – 

  • Micro units: Investment < Rs.1 crore and turnover < below Rs.5 crore
  • Small units: Investment < Rs.10 crore and turnover < below Rs.50 crore
  • Medium units: Investment < Rs.50 crore and turnover < below Rs.250 crore

Moreover, the distinction between manufacturing and service enterprises has also been removed. Now all companies shall be defined uniformly.

Factors to consider before applying for MSME loan scheme

One of the most significant reasons business owners fail to qualify for the MSME loan eligibility criteria is the lack of awareness regarding the prerequisites to avail credit. In effect, this leads to the company’s slow economic growth, further making it difficult for them to sustain profitability.

Therefore, it is crucial to ensure that a company does not run out of working capital. Mentioned below are a few aspects one must consider when approaching a financial institution to avail a loan for MSMEs.

  1. Healthy credit score

Credit history can play a crucial role when availing a business loan for MSMEs, as financial institutions use the CIBIL score to determine an applicant’s creditworthiness. A healthy credit score indicates that the borrower is financially stable and sticks to his/her repayment schedule.

Suppose small enterprises do not possess a good credit score (750 or above). In that case, lenders might hesitate to extend loans as they cannot predict their accountability in terms of repayment.

  1. Audited financial statements

Some MSME loan schemes may require minimal documentation. However, to keep the loan application procedure proceeds smooth, businesses have to produce audited financial statements and the loan application.

Typically, financial institutions are more likely to sanction loans for companies that can show stable income and steady growth over time. Thus, applicants can also study market traction and include that in their loan pitch.

  1. Profitability and end-use

If a business is profitable, it reflects that the firm has enough liquid funds to repay credit. Hence, the profitability of operations and tax repayment can significantly impact the MSME loan eligibility.

Additionally, note that the funds can only be used to maintain operations or expand the concerned business. Many lenders emphasise documenting the proposed end-use during the loan application and might track the account to monitor fund usage.

  1. Fees and interest rates

Different lenders charge a processing fee during the loan application, including stamp duty and other charges. Hence, a smart move will be to select a lender that charges a minimal processing fee, which will, in effect, keep the loan amount low.

The interest rates charged vary depending on the MSME loan scheme as well as the lender. Such financial institutions consider several factors, including collateral, credit amount, CIBIL score, loan tenor, FOIR, and other financial obligations, to decide the loan’s interest rates.

  1. Other documents required

Apart from audited financial documents, the applicant also has to supply several other documents and the loan application. These documents include existing loan details, parent company (partnership deeds), registration certificates, sales tax filing documents, income tax deeds, and sector-specific licenses if any.

Hence, applicants should validate and preserve all such reports and documents and submit them along with their loan application.

However, one can skip the hassles mentioned above by opting for a financier that offers pre-approved offers. NBFCs like Bajaj Finserv extend such offers on credit cards, business loans, etc., requiring minimum documentation. You can check your pre-approved offer by entering a few essential details like name and contact number.

Hence, applicants should approach their preferred lender and enquire about the details first-hand before applying. Additionally, they should prepare a detailed business plan, which should increase their odds of procuring a business loan and meet any number of financial requirements with ease.

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