How to Make an Application for an MSME Loan?

Do you know that applying for an MSME loan is easier and quicker than before? Thanks to NBFCs, which have launched several schemes and initiatives to help entrepreneurs and small business owners avail credit. The number of startups has increased in the last few years. But shockingly, most startups fail due to a lack of funds. This is where MSME loans come into the picture and help entrepreneurs avail credit at competitive rates. But first, let’s understand the meaning and importance of Micro-small and Medium-sized enterprise loans.

Facts About the Role and Scope of MSME in India

The MSME sector is one of the leading economic boosters in the Indian market, contributing significantly to the overall economic development. Not just the economy, the sector has also provided employment opportunities for millions of people across the nation.

Currently, around 60 million MSMEs are operating in India, accounting for nearly 45% of the total industrial output and 50% of the exports from India. The sector also provides a significant portion (29%) of GDP employing 120+ million people.

MSMEs have become essential contributors to various industries in India, ranging from food processing, leather goods, apparel manufacturing, chemicals, and pharmaceuticals to textiles and IT services. Businesses under MSMEs offer innovative products and services to consumers that help drive growth in rural and urban economies.

What is an MSME Loan?

Micro, Small and Medium-Sized Loans are financial instruments issued by institutions like lenders, credit unions, or other private lenders to help businesses establish themselves. You can use funds to purchase inventory, open new locations, expand your operations, etc.

They usually come with flexible repayment terms and competitive interest rates. The amount dispersed under these loans is based on your business size and current income levels. MSMEs are typically unsecured loans that require no collateral or guarantees from the borrower to receive funding from the lender. By offering this type of loan, lenders are helping small businesses grow while minimising risk to their institutions.

Characteristics of MSME Loans

The critical characteristics of MSME loans are flexibility, competitive interest rates and access to funds. You can use funds to purchase inventory, expand operations, open new locations, etc.

Typically, these loans come with flexible repayment terms and will depend on the size of the business and its current income levels. Interest rates on MSME loans tend to be lower than traditional loans as lenders have less risk involved in offering them. Funds from MSMEs are also often available faster since the loan process is typically more straightforward and quicker than other financing options.

Advantages of MSME loans

• Fast and easy access to funds: MSMEs are typically easier and faster to obtain than traditional loans as they require less paperwork and fewer qualifications.
• Flexible repayment terms: Lenders can offer flexible repayment plans with lower interest rates and longer terms depending on the business size.
• Low risk for lenders: Since these loans are usually unsecured, lenders face less risk when offering them than with other financing options.
• Higher chances of approval: With MSMEs, businesses have a higher chance of approval since the loan process does not require collateral or extensive credit history checks as traditional loans do.
• Increased growth potential: With access to additional funds, businesses can expand their operations and reach new markets, leading to increased growth potential.

Easy Steps to Apply for MSME Loan 

Since the introduction of NBFCs, applying for an MSME loan has become easy. Check out the following process if you are looking to apply for an MSME loan.

1: Understand Your Credit Worthiness 

The first step to applying for an MSME loan is understanding your creditworthiness. Understanding your credit and its worthiness will give you an idea of type of loan you can get and its repayment period. There are different methods to check your credit score and choose any at your convenience. Remember, higher your credit score, the better your chances of getting a loan from any lender.

2: Check the Eligibility Criteria 

It is important to check if you fulfil the eligibility criteria set by NBFCs before applying for an MSME loan. Generally, lenders prefer individuals who are in business for minimum of two years, and have a turnover of more than Rs. 40 lakhs and have a good credit score.

3: Research Different Options 

Once you understand the eligibility criteria, it’s time to research the options available. Compare interest rates offered by financial institutions and NBFCs, look at the repayment period being offered and read up customer reviews before making your decision.

4: Submit the Application 

Once you decide which option suits your needs, it is time to apply with all the relevant documents the lender requires. Ensure all your details are accurate and up-to-date so the application process will be completed on time.

5: Get Approved 

If all goes well, the lender’s end executes the final step. The lender reviews your application and will inform you if your loan request is approved. If approved, you can get credit from the lender and use the funds to expand your business operations.

Things you should Avoid While Applying for MSME Loans

Mostly, you will be able to get an MSME loan for your startup pretty easily. However, to avoid any exceptional circumstances, consider avoiding some things.

• Not researching the loan eligibility criteria: Before applying for an MSME loan, it is essential to understand its criteria and eligibility requirements of the concerned financial institution.

• Not having sufficient collateral or security: Many lenders require a form of collateral or security when approving applications for MSME loans. The collateral can be evaluated as property, machinery (tangible assets), or even intellectual property (intangible assets). It is, therefore, important to provide sufficient security before applying for a loan.

• Applying to multiple lenders simultaneously: Applying with multiple lenders at once can decrease your chances of getting approved since it will take longer to process the loan applications. It is best to apply with only one lender and then wait for their response before considering going to another lender.

• Failing to provide accurate information: Financial institutions will require detailed financial and personal information from applicants when processing loan applications. It is essential to submit accurate information so that the lenders can properly assess the applicant’s eligibility and make an informed decision about the application.

• Neglecting the paperwork: Applying for an MSME loan involves a lot of paperwork. It is important to thoroughly read the loan documents and make sure that all information provided is accurate and updated before submitting it to the lender.

• Not having an exit plan: Before applying for an MSME loan, it is essential to have a clear idea about how you will repay the loan. Make sure you create an effective financial plan to meet your repayment obligations on time.

Conclusion

Applying for a MSME loan requires careful planning and research. Make sure that all eligibility criteria are met, have sufficient collateral or security, apply with only one lender at once, maintain good credit scores, submit accurate information on your financial and personal details as well as have an exit plan to increase your chances of getting approved for the loan. And most importantly, read through the loan documents carefully before submitting them to the lender. Doing so will help ensure a smoother experience during the loan approval process.

FAQs

1. What are the eligibility criteria for applying for an MSME loan?

Creditworthiness, compliance with legal & regulatory requirements, annual turnover, and business age are the eligibility criteria.

2. How do I choose the right financial institution or lender?

Consider loan terms, repayment flexibility, interest rates, customer reviews, and the lender’s reputation.

3. What factors do lenders consider when assessing my loan application?

Lenders will consider credit history, repayment capacity, collateral, and financial stability.

4. What are the types of MSME loans available?

Working capital loans, machinery loans, invoice financing, and term loans are a few types of MSME loans available.

5. What is the duration to process an MSME loan application?

The process duration will depend on lender to lender. They all process the application in varying durations.