With over 60 million small businesses, India’s micro-small and medium-sized enterprises (MSMEs) sector not only accounts for a significant portion of the country’s economy, but also employs a significant portion of the population and supports millions of people. households. Despite the huge contributions of the MSME sector to India’s national GDP and exports, the World Bank estimates India’s MSME credit deficit at over $ 350 billion.
MSME loans are a catch-all term for the different modes of financing granted to this sector by public or private lenders. These loans are a key ingredient in keeping the MSME ecosystem up and running, as small businesses often operate with limited resources and cash. Different forms of financing provide small business entrepreneurs with access to the capital they need to continue their operations, as well as to undertake improvement and expansion of their business.
However, accessing loans from MSMEs has always been a barrier for most small businesses in India. This is largely due to the risk aversion on the part of traditional lenders such as banks and the requirement of primary collateral of land or real estate against loans. This scenario is changing with the advent of new age lenders who meet the needs of this segment by providing personalized customer service, using digitization for faster disbursements and using data science and machine learning. for credit underwriting and risk assessment.
While the needs are vast, many small business owners today have more opportunities to get credit faster, even without a home mortgage collateral. There are some things potential borrowers can do to make the process smoother.
Here are three tips to make it easier to get your first MSME loan:
Check your eligibility before applying for a loan
It is important to check if you qualify for a loan from the lender of your choice before applying. This is because multiple inquiries made in a short period of time can end up lowering your credit score even if the loans are approved.
Whenever you apply for a loan, the lender accesses your credit report from the credit bureaus and this is seen as a red flag if too many lenders check your credit at around the same time.
Before applying for a loan, check the lender’s website for eligibility criteria or contact them to see if you qualify.
Each lender will have different criteria such as the specific sectors in which your business must operate; how long the business has been in business; where is the business located; GST returns; what is the credit rating of the business, etc. Once you have met the basic eligibility criteria, you need to selectively apply for loans from two or three lenders.
Compile and formalize the necessary documentation
Lenders will ask for a list of settlement documents before they can come up with a loan decision. Different lenders have different requirements when it comes to submitting documents, they will need personal and business identification documents and financial records. The typical set of documents that you can expect to request are:
- Personal identification (KYC) – PAN, Aadhaar, passport, voter card, driver’s license are the type of documents required to confirm your identification and proof of address.
- Company Identification – Commercial PAN is generally a mandatory requirement. Other forms of business identification may differ depending on your industry and state, including records such as Certificate of Commerce and Establishment, Certificate of Factory Registration, and License for Industries small scale (SSI).
- Udyam registration certificate – All MSMEs are required to have a unique registration number issued by the government, issued by the Ministry of MSMEs. Registration for Udyam is available free online.
- Special sector licenses – Depending on your industry, you may need to provide specialized licenses that authorize your business to operate and confirm that you are in compliance with local and state laws regarding responsible use of materials and maintaining necessary standards.
These licenses may include:
- Pollution Control No Objection Certificate (NOC).
- Certificate from the Forestry Department.
- Food Safety and Standards Authority of India (FSSAI) certificate for food manufacturing, or Food, Safety, Drug Administration (FSDA) certificate.
- Income tax returns (ITRs) and goods and services tax (GST) returns – Some lenders may require you to provide your recent GST and RTI returns to assess that you are in compliance and to review your overall tax expenditure as a business. It is important to file them on time and to keep a minimum of two years’ declarations available.
- Professional and personal bank statements – Bank statements are important in assessing your current liquidity and general cash flow which will affect your loan approval, loan term and interest rates. You must keep clean records of your business activity and there must be a separation of the use of your personal and business bank accounts. For example, you should not pay children’s school fees from your business account as it is a personal expense. Vice versa, you should not pay for the purchase of raw materials or the salaries of employees from your personal accounts.
Be clear about the purpose of your loan
Before opting for a loan, it is essential that you know how you will use the loan amount that has been granted to you. Plan carefully what expenses you intend to cover and the timeframe for which you will need the funding. Most lenders offer working capital loans that can be used to meet a range of business needs such as daily operational expenses. However, it is important to categorize and assess your expected expenses before getting a loan.
Planning how you intend to allocate funds will help you budget for unforeseen business expenses. You should also keep documents such as invoices and receipts as many lenders perform checks to ensure funds are not misappropriated and used for the purposes stated in the request.
MSME loans are an excellent tool to help small business entrepreneurs finance their business expenses. By doing your due diligence in choosing the right lender and educating yourself about eligibility and documentation requirements, you can reduce unnecessary delays and increase your chances of getting approved.
Planning ahead to determine how much loan you need and how you will allocate it, as well as having a repayment plan in place, will help you use the funds optimally for the best results for your business. .