Micro Small and Medium Enterprises,(MSME) has vital influence in the creation of employment and contribution to GDP. Proving adequate business loan for MSME is vital for the development and promotion of this sector. The lower part of this sector faces problems in getting hassle-free business loans.
MSME sector can show a high rate of growth if its bottom level gets more access to affordable, adequate, financial support at the right time. Banks and financial institutions always ready to provide business loan for MSME in India, if they have bankable projects.
In this article, we try to explain how the MSME can convince the banks and financial institutions with their projects and how to propose a bankable project.
Honourable Finance Minister Smt. Nirmala Sitharaman declared on 13th May 2020, that the definition of MSME has revised. The Revised MSME Classification Based on Investment and Turnover is as under
|Manufacturing & Services||Investment < Rs 1 cr.|
Turnover <Rs. 5 cr.
|Investment < Rs 10 cr.|
Turnover <Rs. 50 cr.
|Investment < Rs 50 cr.|
Turnover <Rs. 250 cr.
Table of Contents
Business Loan for MSME
Usually, there are three types of loan available for business and MSMEs.
- Term Loan
- Working Capital Loan
- Discounting of Bill
(1) Term Loan
Term loans usually granted for a fixed period. The purpose of this loan may be the acquisition of a factory, or land and building etc. The term loan is repayable in specified repayment schedules like monthly or quarterly intervals.
If you have a project with a comparatively huge capital outlay, you can approach a bank for a term loan. Once the bank disburses it, you need to repay it with the interest as per the repayment schedule.
(2) Working Capital Loan
The working capital loan can be used for meeting the day to day running of the business. This loan has significant influence in case of loan for small and medium enterprises.
Working capital loan granted usually for a short period like one year. It may be granted like Trade Credit, Cash Credit or other loans for a short term period.
(3) Discounting of Bills
Discounting of Bills also considered as a working capital loan. It helps you to encash your Bill in advance from the banks or financial institutions.
Collateral and Collateral Free Business Loan for MSME
When you start thinking of a bank loan, you may come to know the terms like Margin Money, Primary Security, Collateral and collateral-free.
Margin Money means your contribution to the total amount of funds required for the project. Suppose you need to find the fund of INR 10 Lakh. When you approach a bank, the bank may agree to fund 8 lakh of the project, then you need to find the remaining 2 lakh from your pocket.
Your own money out of the total project cost is called margin money. Usually, it is expressed as a percentage. In the above case, the bank is ready to grant 80% business loan for MSME and your margin money is 20%. In finance, it is called the Debt Equity Ratio.
Primary Security indicates the bank considers the assets or properties created under the particular business as Primary Security.
You may obtain a business loan for MSME easily if you have any security to provide the banks to cover your loan. A bank credit with collateral means you have to provide any property or assets to pledge with the bank for the security of the loan. It may be land, building, residential buildings etc.
When an entrepreneur comes with a business idea, in most of the cases, they will not have sufficient capital to realize their dream. In India, we have various agencies working together to support these businessmen to transform their business into a global brand.
Primary support to these new generation entrepreneurs is the hassle-free, collateral-free, third party guarantee free loans to set up an MSME business.
Collateral free loans always carry an additional cost to the borrower like the cost of premium or guarantee coverage. If you can pledge any security, it will help you to reduce the cost of borrowing and it eventually works as a pillow to secure your business loan for MSME.
Anyway, don’t worry if you do have a collateral to offer to your bank. We have government support in the form of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and National Credit Guarantee Trustee Company (NCGTC).
These organizations will help your ideas come to reality with a collateral-free loan. They provide a credit guarantee cover to the banks and other financial institutions for the collateral-free loan and advances granted without third party guarantee.
How to apply for an Business Loan for MSME
This application process for a business loan is easy and also time-saving. You do not need to wait in the queue of the busy branch of your bank or even, no need to knock the door of the Asset Manager or Bank Manager of the preferred banks.
MSME loan application online is a competitive online marketplace where you can compare the products of other financial institutions. You can access banks and other financial institutions including Peer to Peer lending platforms like Lendbox, Faircent, Easy Rupiya, LenDen Club, Rubique etc.
MSME loans can be availed in between two to six weeks from the date of receipt of applications, depending on the amount of loan applied and the completeness of the application.
Suppose, you apply for a loan up to five lakh, it may get disbursed within two weeks, provided that your application is complete with the required documents. It may take three weeks if you wanted a loan above five lakh up to twenty-five lakh. Above twenty-five, lakh loan amount may be disbursed within six weeks.
Convince the Banker for Your Eligibility
Please don’t go to your banker carelessly to file an application form for the MSME loan or any business loan. If you are serious regarding getting credit and funding the business, you need to do some study before approaching the bank. The bank may decide to fund your business, in case you market your business plan to them properly.
As they are funding your business, they have a concern about the success and growth of your business. Treat them as a potential investor of your business and prepare a clear marketing plan for your business or expansion project.
1. Know Your Business Idea
If you require a business loan or MSME loan, you need to convince your banker that you have a winning business proposal. If you don’t have crystal clear ideas about your business proposal, you will not be able to convince others too.
So you have to study your business proposal in depth before addressing a bank for MSME business loan.
- What is the type of business you wanted to do or diversification you wanted to adopt in case of the existing business
- Will you manufacture something or provide a service
- If manufacturing, what is the process of manufacturing
- Who can supply the manufacturing units or types of machinery to produce the product
- What kind of problem can be solved when you start your business.
- Level of availability of raw material
- Competitors of your business and their business share.
- Why society needs your product or what differentiates your product from the competitors
- Government policies and regulation in a particular industry.
2. Your Personal Bio-data
When you approach a bank, the bank may be interested to assess your credentials also. They can assess your details if you provide a biodata.
So you can prepare a single or two sheet personal bio-data ready with you. You can mention the below details.
- Your educational qualifications
- Membership details in the professional associations
- Your employment or business history
- How these experiences help you in your entrepreneurial journey
- Attach a copy of your achievements, recognitions and references etc.
3. Current Banking Details
- You can mention the current bank
- Facilities available from the current bank
- Your loan and repayments details
4. Legal Documents in case Existing Companies
- Register your business with concerned registering authorities. In the case of companies, they must be registered with the Registrar of Companies (ROC).
- Udyog Aadhar Registration
- Income Tax and GST Registration and filing details
5. Your Financial Statements in case of an Existing Business
- Your recent Profit and Loss Account
- Recent Balance sheet
- Recent Cash flow statement
- Budgets for the current year and upcoming years
- Your clients’ details and documents of their current and future orders
6. Project Report
- Prepare a professional project report for the with the help of experts like Certified Credit Counsellors
- Provide realistic information in the project report
- Provide the actual capital requirements and expenses
- Your own contribution or margin money
- Provide the break-even points and the revenue-generating stages
- Provide the income and expenses forecast for at least next four to five years
7. Prepare a Feasibility Study Report
When you apply a business loan for MSME for your new project or an expansion plan, your banker will be interested to see your business feasibility study report also. It is an important study in the following areas of your business
- Market -demand analysis of your business
- Technical analysis like the requirement of man and machinery
- Financial feasibility of your project
- Operational Feasibility
- Sensitivity analysis
- Economical analysis
8. Credit Information Report
You need to obtain a Credit Information Report. You can get this report from Transunion CIBIL Ltd, Experian Credit Information Company of India Pvt Ltd., CRIF High Mark Credit Information Services Pvt. Ltd., Equifax Credit Information Services Pvt. Ltd. The lender uses this Credit Information report to assess the borrower’s creditworthiness. You can get your Business Credit Report also if it is an existing business.
A Credit Information Report describes your credit history. To maintain a good score in the report, pay your dues in times for all type of loans. You need to be careful when issuing cheques.
A bright idea about all these factors will help you to improve your confidence while communicating with your banker. As you approach the banker, try to meet the concerned bank executives of loans or asset division of the branch. Taking an appointment to meet the bank officials in advance can be deemed as a professional.
In the busy environment of the banks, you may not get enough time for a comprehensive explanation of your requirements. Try to convey a clear and to the subject information to the banker and answer their queries with confidence. Your confidence has much importance in the success of your business.
This article meant for educating the new and existing entrepreneurs regarding their minimum requirements when they approach a bank for a business loan for MSME in India. We do not provide any guarantee to your loan application as the banks and financial institutions appraise the business projects and approve the loan at their sole discretion.
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