Accelerate Your Revenue Growth With An MSME Business Loan

Micro, small and medium enterprises (MSMEs) contribute significantly to India’s gross domestic product even though a vast majority of such businesses are part of the informal sector of the economy.

This sector has recorded a high growth rate in the last few decades, especially after liberalisation in the 1990s. At the same time, there are additional factors that can help MSMEs realise their full potential.

MSMEs in India are largely unorganized. Many business owners tend to use their savings to start operations, but to grow their business they need to reinvest. One can do this by ploughing in more personal or family savings or through cash flows or via MSME loans.

What’s An MSME Loan?

An MSME loan refers to any loan or credit facility provided by banks or non-banking finance companies to micro, small and medium enterprises to meet their financial requirements.

Many lenders provide small-ticket MSME loans without any collateral, but they typically require collateral to approve bigger loans. The collateral can be a piece of land, a house or commercial property.

Generally, startups and businesses of small and medium scale do not have property or assets to meet the collateral requirement of many lending institutions. Hence, a major chunk of MSME business loans are unsecured.

Using MSME Loan To Grow Revenue

• Financing expansion through cash flows tends to delay expansion as it takes time for a business to generate enough surplus to be reinvested in the company.
• Moreover, most MSME entrepreneurs do not have the capacity to keep putting their savings into business. As a result, availing an MSME loan to expand is the best way to grow big.
• MSME loans are an ideal source of funds to meet the requirements of borrowers for business growth. They can use such loans for a range of activities to expand their business.
• MSMEs can use such loans to meet working capital needs, buy raw materials or inventory, purchase fixed assets and equipment, upgrade technology and infrastructure, and for marketing.

There are, however, a few important prerequisites for a business entity to avail an MSME loan.

Credit Score

If a borrower defaults on a loan, the lender faces a credit risk. So, lenders assess an applicant's credit history and credit score to evaluate the borrower's competence to repay loans in a timely manner.

The credit score reveals a borrower’s creditworthiness. This is based on one’s credit history, which encompasses factors like timely repayments, number of times one has borrowed, the amount borrowed, the type of loans, etc.

A good credit score of 800 and above not only helps one get an easy line of credit but also helps negotiate a better rate of interest and other terms.

Statutory Registrations, GST

Registration of a business under the Goods and Service Tax (GST) law is important. Under the GST law, a business entity obtains a unique number from tax authorities that allows them to collect tax on behalf of the government.

Lenders prefer sanctioning MSME business loans to businesses registered within the statutory framework as required.

Financial Statements, Bank Statements

Accounts help to understand what is happening in a business. Often, lenders of MSME loans ask for an audited financial statement from potential borrowers since it is proof of an accurate business record.

These statements help the lenders to assess how well the business has been managed financially. A financial statement reflecting good profits and a consistent cash flow leaves a positive impression on lenders.

Bank statements give the lenders a fair idea about the actual cash flow and the financial soundness of a business entity. Bank statements help lenders to assess the primary inflows and outflows into the business on the basis of which the loan eligibility is determined.

Sound Business Plan

A fair projection of the future business plans is helpful for the lenders to decide the borrower’s repayment ability through cash flows. Hence, while applying for a MSME loan, a realistic expansion plan must be submitted.

Conclusion

Most small business owners typically do not have enough of their own money to start and grow their ventures. Moreover, many businesses in their initial stages do not have stable cash flows and profit that they can reinvest to grow their operations. This is where MSME loans can prove beneficial.

All banks and non-banking financial institutions such as IIFL Finance offer MSME loans for a variety of purposes. Reputed lending institutions like IIFL Finance understand the financial needs of every MSME.

Even if a young entrepreneur with no property or assets wants capital for expansion, one can secure a collateral-free line of credit from Rs 10 lakh to Rs 30 lakh at IIFL Finance. Minimal documentation, competitive lending rates and quick loan disbursal make IIFL Finance a preferred choice for many MSMEs.