With upwards of 60 million small businesses, the Indian micro-small-and-medium enterprise (MSME) sector not only makes up a hefty part of the nation’s economy, but also employs a significant part of the population and supports millions of households. Despite the MSME sector’s immense contributions towards India’s domestic GDP and exports, the World Bank estimates the MSME credit gap in India to be more than $350 billion.
MSME loans are a catch-all term for the various modes of financing extended to this sector by public or private lenders. These loans are a key ingredient in keeping the MSME ecosystem up and running, since small businesses often run on limited resources and liquidity. Different forms of financing offer small businesses entrepreneurs access to the capital they need to keep their operations running, as well as undertake business improvement and expansion.
However, accessing MSME loans has always been a hurdle for most small businesses in India. This is largely because of risk aversion on the part of traditional lenders such as banks and the primary collateral requirement of land or property ownership against loans. This scenario is changing now, with the advent of new-age lenders who cater to the needs of this segment by providing personalized customer service, using digitization for faster disbursements, and employing data science and machine learning for credit underwriting and risk assessment.
While the need is vast, many small business owners have more opportunities today to avail faster credit, even without property collateral. There are some things that potential borrowers can do to make the process smoother.
Here are three tips for you to make it easier to get your first MSME loan:
It’s important to verify whether you are eligible for a loan from the lender of your choice before you put in your application. This is because multiple inquiries made within a short period of time can end up pulling down your credit score, even if the loans are approved.
Each time you apply for a loan, the lender accesses your credit report from the credit bureaus and it is considered as a red flag if too many lenders are checking your credit at around the same time.
Before you apply for a loan, check out the lender’s website for eligibility criteria or contact them to see if you qualify.
Each lender will have different criteria such as specific sectors your business must operate within; how long the business has been in operation; where the business is located; GST returns; how high the business credit score is, etc. Once you have cleared the basic eligibility requirements, you should selectively apply for loans from two or three lenders.
Lenders will ask for a list of establishing documents before they can offer a loan decision. Different lenders have varying requirements when it comes to document submission, they will require personal and business identification documents, and financial records. The typical set of documents that you can expect to be asked for is:
These licenses can include:
Before you opt for a loan, it’s crucial that you know how you will use the loan amount issued to you. Carefully plan out the expenses you intend to cover with it, and the timeline for which you will need the financing. Most lenders will offer working capital loans that can be used towards a range of business needs such as day-to-day operational expenses, however, it is important to categorize and assess your expected expenses before getting a loan.
Planning out how you intend to allocate the funds will help you budget for unexpected business expenses. You should also keep records such as invoices and receipts, since many lenders carry out checks to ensure that the funds are not being misused and used for the purpose cited in the application.
MSME loans are a great tool to help small business entrepreneurs fund their business expenses. By doing your due diligence in choosing the right lender and finding out about eligibility and documentation requirements, you can reduce unnecessary delays and increase your chances for approval.
Planning ahead to determine the loan amount that you need and how you will allocate it, as well as having a repayment plan in place, will help you make optimal use of the funds to achieve the best outcomes for your business.
Hardika Shah is the founder and chief executive officer of Kinara Capital. Prior to Kinara Capital, she has worked as a management consultant with Accenture for over 20 years. Hardika holds a BA degree in computer science from Knox College in Illinois, USA, and pursued a joint MBA program by Columbia Business School and UC Berkeley’s Haas School of Business.
Armaan is the India Deputy Editor for Forbes Advisor. He has more than a decade’s experience working with media and publishing companies to help them build expert-led content and establish editorial teams. At Forbes Advisor, he is determined to help readers declutter complex financial jargons and do his bit for India's financial literacy.
