How An MSME Loan Can Reinvigorate Your Startup

Establishing a business takes time, effort and, well, a lot of capital. From inception to sustenance and expansion, all businesses require financial resources at every step of the way. So, whether a business is looking for new office space, buying new machinery, upgrading its technology or infrastructure, or spending on advertising and marketing, capital is the most critical ingredient that makes all these activities possible.

The need for capital is even more important in the case of micro, small and medium enterprises (MSMEs) as well as startups, especially at the early stages of their lives.

Broadly, there are two main routes an MSME or startup can adopt to ensure it has adequate financial resources.

1. Equity infusion from the founders, other shareholders or external investors;
2. Borrowings from banks, non-banking finance institutions or other lenders.

Equity Infusion Versus MSME Loan

Over the past decade or so, India’s startup ecosystem has grown by leaps and bounds. Startups have emerged across many sectors, from online retail to direct-to-consumer retail and from online learning to digital payments.

Most of these startups depended on equity investments from a growing number of angel investors and venture capital firms in the initial stages. This is because of several factors, including the reluctance of banks and NBFCs to lend to early-stage startups whose business model is unproven, who have few assets and are making losses.

Over time, many startups mature into larger firms. They prove their business model, accumulate some assets, grow their revenue and chart a path to profitability. At such a time, an MSME loan from a bank or NBFC can come in handy for further expansion, especially if the owners do not want to dilute additional equity to external investors.

MSME Loan: The Who And What

In simple terms, an MSME loan refers to any business loan or credit facility provided by banks and NBFCs to micro, small and medium enterprises to meet their financial requirements.

Almost all commercial banks and NBFCs offer MSME loans. To clarify, MSMEs are not the only ones who can take on such loans. Startups, women entrepreneurs, small business owners, self-employed professionals, and proprietary and partnership firms of small and medium size can also secure funding through MSME loans.

The amount, tenor and the interest rates on MSME loans can differ from lender to lender. The interest rate depends on several factors, such as cash flow of the business, credit score, and revenue and profit.

In general, banks and NBFCs provide small-ticket MSME loans without any collateral. But they can ask for collateral to sanction bigger loans. The collateral can be a piece of land, a house, any commercial property, or even gold.

Why Take An MSME Loan?

• One of the biggest advantages of an MSME loan over raising equity funding from external investors is that the founders can retain control of the business they started.
• An MSME loan to expand a business is also better than other routes such as a personal loan or credit card debt, which carry higher interest rates and may not offer as big a sum as required.
• Moreover, startups, MSMEs or entrepreneurs can take such loans for a variety of purposes.
• MSME loans can be availed quickly, within days, through a simple and hassle-free process.

Using An MSME Loan

Startups can take on MSMEs loans to meet a host of requirements that can help them expand. These can include:

• Short-term working capital requirements;
• Buying inventory or other inputs;
• Buying land, equipment or other fixed assets;
• Upgrading infrastructure or technology;
• Marketing, advertising or even hiring.

Conclusion

MSME loans are ideal for startups to meet their financial requirements. These loans are sanctioned and disbursed quickly. Most banks and NBFCs have different types of loan products to help startups grow their business.

Compared to banks, NBFCs offer greater flexibility in loan tenors and repayment of a small loan. Many NBFCs even customise the repayment cycle according to the cash flow cycles of the startup.

Many banks and NBFCs such as IIFL Finance even complete the entire process online, so the borrower does not even need to visit any branch. IIFL Finance offers smaller loans of up to Rs 30 lakh without any collateral and loans up to Rs 10 crore if the borrower provides collateral.