The MSME sector is the backbone of any developing economy. These companies range from small retail shops to medium-sized manufacturing units and contribute significantly to the country’s employment rate and GDP.
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However, they need financial assistance in the form of loans to sustain and grow. Navigating the MSME start-up loan application process is confusing, especially for first-time borrowers. So, here is a comprehensive guide to explore the tips for obtaining an MSME loan.
Understanding Your Business Needs
Before beginning with the application process, have a clear understanding of your reason for borrowing. Do you need funds to expand your operations, purchase new machinery, restock inventory, or build working capital?
Having a clear purpose helps you determine an adequate loan amount and demonstrates your seriousness to the lending companies.
Checking Your Credit Score
The credit score is a crucial determining factor in loan application and approval. Your business and personal credit score are equally important for approval. Lending institutions use these 3-digit numbers to assess your creditworthiness. A higher score boosts your chances of approval. So, keeping it in good shape avoids unpleasant surprises during loan processing.
Check your credit score before applying and take prudent action to improve it if necessary. Repaying all EMIs and credit card bills on time, diversifying the credit portfolio, reducing the debt-to-income (DTI) and credit utilisation ratio, etc., are some tips to build and maintain a decent credit score.
Evaluating Your Loan Eligibility
Rather than wasting time applying for a loan that you do not qualify for, check the lender’s eligibility conditions and use an eligibility calculator to ensure your eligibility. This is an obvious, simple step but holds great importance for loan applications.
Providing Transparent Financial Information
Honesty is the best policy when applying for an MSME startup loan. Since this information is crucial for lenders, providing false information or fudging numbers might lead to loan rejection, legal action, and other severe consequences.
Since loan providers have stringent verification procedures to check financial information, you will create a negative impression if they discover any discrepancies.
Preparing a Solid Business Plan
Lenders prefer borrowers with a well-defined business plan. It must outline your intentions for using the loan, growth prospects, and repayment strategy. For instance, if you seek a hotel loan, include your loan requirement in the application along with your plan to use the loan and support your business growth. A comprehensive plan makes your application more attractive to lenders and helps you track your business goals.
Borrowing Adequately
While obtaining an MSME loansignificantly boosts the business, you must only borrow up to your repayment capacity. Over-borrowing leads to cash flow issues, potentially posing a risk of default. Evaluate your loan repayment, calculate the cost of intended expenses, and decide upon a loan amount you can comfortably repay.
Keeping the Financial Records in Order
The lenders will thoroughly scrutinise your financial records before approving your loan application. These include your balance sheets, income statements, tax returns, etc. Keep these documents up-to-date, organised, and accurate to convince the lenders of your repayment capacity. Any inconsistencies or discrepancies might lead to rejection.
Applying to a Single Lender After Proper Research
Comparing loan plans is essential, but you must submit a single loan application after proper research and comparison. Since each loan application pulls a hard enquiry on your credit report, applying to multiple lenders simultaneously will negatively impact your credit score and reduce your eligibility.
Therefore, the best strategy is to narrow down the choices after careful research and planning and selecting one lender with the best loan plan. The best loan deal includes ample loan amounts, competitive interest rates, flexible repayment terms, efficient customer service, etc.
Utilising Online Tools
Take advantage of online tools like eligibility and EMI calculators to make an informed borrowing decision. These tools help determine your loan eligibility, monthly EMIs, and repayment tenure, making budgeting easier for loan repayments. Using them at the right time also provides insight into your loan affordability, making a positive impression on the loan provider.
Taking Time During the Application Process
Take time and give attention to each detail when making an MSME loan application. Rushing through the process might result in inaccurate and incomplete applications, leading to rejections and delays. Fill out the application form and carefully provide all the necessary documents.
Plan Finances Efficiently
Before securing an MSME start-up loan, plan your finances efficiently and have a robust plan. Financial management and budgeting are vital to successful loan applications. Create a repayment plan and allocate the required funds to pay your EMIs on time without stretching your business finances.
Obtaining an MSME loan is a valuable step towards business growth. By following the tips outlined in this comprehensive guide, you can navigate the application process efficiently, enhance your approval chances, and manage loan repayment responsibly. Remember, sound financial management and responsible borrowing are key to MSME success in India.
