What Msmes Should Know Before Applying For A Business Loan
India’s MSME sector is an important pillar of the Indian economy. There are about 6.3 crore MSMEs producing more than 8000 products and contributing around 30% to the GDP of the country. The Indian MSME sector contributes significantly to employment, providing 45% of the total employment. The sector is also globally competitive accounting for about 40% of the country’s exports. However, the MSME sector has been facing severe problems due to the pandemic, such as a fall in demand, interruption of production due to the shortage of workforce, and inability to pay salaries to its employees. So, to get back on track, they need funding, and the need for MSME business loans has increased. The government has extended the Emergency Credit Line Guarantee scheme (ECLGS) till March 2023 and increased its cover to cater to the needs of the MSMEs. Further, it has announced the allocation of 2 Lakh Crore to the Credit Guarantee Trust to expand credit to this sector.
Although these come as a major relief for SMEs, lack of knowledge amongst SME business owners about requisites for a business loan is a hindrance for approval of loans. So, what should MSMEs know before applying for a business loan? If you are an MSME business owner, here are some of the factors that you should consider before applying for a business loan.
Factors that you should consider before Applying for a Business Loan:
Your credit score is vital for the business loan to be sanctioned. The higher your credit score, the higher the chances for loan approval. Also, the credit score determines the interest rate and terms for your loan. Lenders will give better interest rates if your business has a good credit score and credit history. The conditions of the loan will also be more favorable. So, you should improve the credit score of your business before applying for a business loan.
Know All About Your Business
To get the correct loan amount and to make good use of the loan, you need to know all about your business – the function of your business, its current financial health, what credit options the business has availed, whether you need to get the loan or whether you can get investors to fund your business, and so on. An analysis around these aspects will help you get a suitable business loan for your MSME
Your Business Must have a Complete Record of Its Financial Health
One of the reasons why loan approvals are delayed or rejected is due to inadequate information and a lack of appropriate documents about the financial health of the business. To overcome this problem, we have the CIBIL rank, company credit report (CCR), audited financial statements, and the GST report.
The company credit report is a record of the credit history of the company and its creditworthiness.
The Cibil Rank summarizes the credit report in a single number. It is a number from the scale of 1 to 10, and 1 is the highest rank that can be achieved. Generally, a rank between 1 and 4 ensures higher chances of getting the loan.
The GST report is a record of your sales, purchases, tax collected on sales, and tax paid on purchases. It is a trusted source for banks, and maintaining a good GST report will speed up the loan approval process.
Audited financial statements help the lender estimate how well the business has been managed financially.
GST and other Statutory Registrations
Lenders feel comfortable to offer a line of credit to your business if your business has been registered under GST and other statutory frameworks. These registrations provide a compliance check for your business.
Your bank statement is a summary of all the transactions that take place in the business. It reflects the actual revenue that flows into the business from sales and also tracks your liabilities. Using the power of modern-day technology, many lending institutions are analyzing the repayment capacity of MSMEs. They thus offer loans based on this technological assessment of your bank account.
Profitability of the Business
Lending institutions lend loans more easily to profitable ventures since profitable MSMEs have more liquid money to repay the loan.
Contact the Existing Banker for the Loan
It is good to contact the existing banker for the business loan because he has instant and verified information about your transactions and bank account. So, loan approval will be easier
Longevity of the Business
Long years in the business help you get a loan easily. Adjusting to changing customer demands, employing growth strategies to develop the business, adapting to market changes, adapting to competition from competitors’ products, and so on ensure longevity in business. This longevity helps in getting loans easily, since continuity in business is a factor lenders consider when assessing your repayment capacity.
Make Realistic Projections About Your Business
The future plans for your business should be projected realistically to the lender. This is one of the factors on which lenders assess the repayment capacity.
These are some of the things that MSMEs should know before applying for a business loan. Apart from these, good credit behavior will help in speeding up the loan disbursal process. While these are some of the factors that you should keep in mind, responsible credit behavior is important.
1: What are some of the factors based on which lenders assess you for approving your MSME business loan application?
Type of business: This loan is generally for self-employed professionals, such as businessmen, lawyers, doctors, chartered accountants, and so on.
Age and Credit Score of Applicant
2. How much is the subsidy for an MSME Loan?
For those entities identified as MSMEs, the subsidy cap is 15% up to a credit of Rs. 1 crore.
3. Is a factory license a requisite for MSMEs?
The government has declared that MSMEs do not need a license, except those which manufacture certain products, such as tobacco goods, defense equipment, dangerous chemicals, and industrial explosives.