As an MSME business owner, you will have to face several unforeseen circumstances. You may have to face an unexpected surge in demand, delay in payments, increase in the price of goods, etc. To tackle these things, you will need a successful flow of cash. 

Nowadays, you don’t have to depend on the informal sector for fund requirements. You do not have to pay unreal interest rates and depend on unrecognized money lenders to meet your business goals.  This is because there are many loan options available to MSME business entrepreneurs today. But, before you take out a loan, you have to shop around and think about a lot of things.

Here are 5 useful MSME business loan tips for young entrepreneurs. 

Check Your Loan Eligibility

Before you apply for an MSME business loan, you should check the eligibility criteria. You can check the eligibility on the lender’s website or from third-party websites where you can compare various loan options and apply for the same. 

Every lender will have different criteria for the business loan and for the loan amount required. If you check the eligibility criteria before, you can then choose suitable lenders to apply with.   

Post applying for an MSME loan, the lender will check your credit score and credit profile. It is not good to have so many enquiries for a credit profile in a short while. This is considered a risk factor by lenders and may also impact your credit score negatively. 

Check The Required Documentation 

Although the need for paperwork has reduced considerably in the recent years, there are still important documents that have to be submitted. The documents required for submission can be divided into the following categories broadly.

KYC Documents

Documents like 

Or any other related documents that would help in establishing your identity and serve as address proof. 

Business Documents

  • Business PAN
  • income tax returns of the business
  • Rent agreement/Utility bills And 
  • Bank statements 

Licenses

Many lenders ask for the Udyam Registration certificate, which is a government-issued identification number for small and medium businesses. This is issued by the ministry of MSME. Some lenders will ask you to submit a copy of the licenses for your business. For example, for a food business, you need to furnish a license from FSSAI. 

Outline The Purpose of The Loan

Before you take the loan, outline the purpose for taking it. In this way, you will channelise the funds correctly and the purpose of taking the loan will be met. For example, if you take an MSME business loan to meet your day-to-day expenses and use it for business expansion, you have trouble servicing that loan because the working capital challenge has not been met. 

Limit Your Loan Requirement

The most important step in taking an MSME business loan is to plan your fund requirement. Emergencies tempt you to take more funds. But, always remember that loaning out more funds will make you spend on unnecessary things. You will have to pay higher interest on it or the EMIs will be higher. So, limit your loan requirement according to your genuine needs.     

Build A Repayment Plan 

It is essential to build a repayment plan before taking out an MSME business loan. Not able to pay back your EMIs on time will impact your credit score negatively. It will also hamper your relationship with the lender. Additionally, you will have to pay penalties and late payment fees for defaulting on loan EMIs. All this will affect your chances of taking credit in the future. 

MSME loans are not backed by collateral. So, lenders decide to give a loan based on the financial standing of the business and also the credit score of the business.

Advantages of an MSME Business Loan

Collateral Free:

The greatest advantage of an MSME business loan is that it is collateral-free. It is provided based on the company’s performance, feasibility of the project, and profile of the management. This helps entrepreneurs who are struggling with finance but do not have or want to risk their assets for a loan. Also, in many rural areas, there are women who start small businesses and employ many women in small trades. These women contribute greatly to the micro economy. MSME business loans for women come in handy for them.

Flexible:

There are MSME business loans to manage expenses for a short period of time.  These loans are designed in a manner such that their tenure is lower. So, you don’t have to worry about the long cycle of debt and it allows you to handle your cash flow challenges quickly.  

Accessibility:

Nowadays, MSME business loans are accessible easily. You do not have to worry about submitting too many documents and the entire process is digital. This simple way to apply and get approval for MSME business loans online is a boon for young and developing entrepreneurs. 

Reduced interest rates:

MSME business loans are given at affordable interest rates. One should also consider the prepayment charge, late fee charges, and processing fees while taking out an MSME loan along with the interest rates. 

Conclusion

MSMEs are a critical component of the Indian economy. According to the India Brand Equity Foundation,  Indian MSMEs contribute over 29% to the country’s GDP, and thus many financial institutions offer loans to these MSMEs. Due to the globally increasing competition and requirement of continuous innovation, MSME businesses require funds to manage their overhead expenses and to maintain a positive cash flow. This is where MSME business loans can be availed easily. However, consider the above important tips as given by CreditMantri before you opt for one. 

FAQS 5 Useful MSME Business Loan Tips For Young Entrepreneurs

1:What must MSMEs know before applying for a business loan? 

MSMEs should know about the following before applying for a business loan

  • Credit score
  • Know all about your business. 
  • Your business must have the full record of its financial health
  • GST and other statutory registrations. 
  • Contact the existing banker for the loan. 
  • Bank statements. 
  • Business profitability

2:Which type of business comes under MSME?

Micro, small, and medium enterprises also called as MSME refers to those establishments where the funding in the machinery and the plant does not exceed Rs. 50 crores and the annual turnover is below 250 crores.