India has become the hub of budding start-up enterprises in recent years, with young entrepreneurs driving innovation and success across industries. The MSME sector has also witnessed a sharp rise with 633.9 Lakh MSMEs currently operating in the nation. However, operating an MSME as a young entrepreneur can be challenging due to the frequent cash crunches that crop up. From an unexpected surge in demand to delayed payments and increasing expenses, MSMEs may require extra funding to manage various day-to-day expenses as well as fuel growth and innovation. The introduction of collateral-free MSME loans has helped solve this issue. With easily accessible MSME loans, small and medium enterprises can access tailored credit to meet the specific requirements of their business.
Whether you want to set-up your MSME business as a young entrepreneur or expand the existing one, you can easily apply for a collateral-free MSME loan through various financial institutions. This article outlines a few easy tips you can use to secure an MSME business loan with ease.
Simple Tips for Young Entrepreneurs to Secure an MSME Business Loan
If you are a young entrepreneur looking to secure an MSME business loan, utilise the following simple tips to gain easy access to finance:
Check Your Loan Eligibility
Each lender has different eligibility criteria when it comes to an MSME loan. Therefore, you should start by checking the eligibility criteria set by your preferred lenders. Financial institutions list the eligibility criteria for MSME loans on their respective websites to help make the application process easier. You can also visit third-party aggregator websites that collate MSME loan eligibility requirements as well as other relevant details on one platform to help make the comparison process simpler.
Lenders check your credit score and credit profile before sanctioning MSME loans. Maintaining a good credit score of 750 and above is generally advisable if you are about to apply for a new loan. Apart from credit score requirements, lenders also have minimum business vintage and turnover listed as eligibility requirements. Additionally, the maximum loan amount offered by lenders also varies. Checking these details helps you apply to lenders who meet your specific requirements.
Draft a Checklist for the Required Document
If you are applying for an MSME loan, this is an indispensable tip you should not overlook. Apart from specific eligibility criteria, lenders also have specific documentation requirements. You need to submit these documents to validate your loan eligibility. As a young entrepreneur, you may be unfamiliar with this document list. Therefore, it is crucial to check this required list of documents before you apply for a loan. Generally, most new-age Fintechs and NBFCs are ready to offer MSME loans against minimum documentation, especially if you are an existing customer.
While the documentation list varies from one lender to the next, typically, you need to submit the following essential documents:
- KYC documents like PAN, Aadhaar, Passport, Voter’s ID, or any other valid identity proof document.
- Business documents like business PAN, ITRs of the business, utility bills, bank statements.
- Registration proof documents like partnership deed, Memorandum of Associations, or sales deed.
- Licence proof documents like trade licence, sales certificate, and lease agreement.
- Udyam Registration certificate since you are applying for the loan as a registered MSME.
Outline the Loan Purpose Clearly
Most young entrepreneurs applying for an MSME loan fail to grasp the importance of this step in the loan application process. Before you apply for an MSME loan, you need to carefully outline the purpose of the loan. Defining the purpose of the loan is crucial because it helps you understand where and how you plan on allocating the sanctioned funds. In simple words, make a plan on how you will use the credit and stick to it.
MSMEs often experience cash flow challenges. Taking an MSME loan without a clear end objective can lead to distractions. The funds may be used to finance unintended purposes, leaving you with little to no money for the actual end goal. For instance, let’s say, you take out an MSME loan for meeting overhead expenses of your business. But after the funds are disbursed, you change your mind and decide to use the funds to expand your business. You may face a problem in servicing this loan because your working capital shortage still persists.
Understand Your Repayment Capacity to Determine the Loan Requirement
Another key tip young entrepreneurs must remember is to only borrow what’s needed. Keeping your loan requirement in check is essential to avoid borrowing beyond your repayment capacity. It may be tempting to borrow extra funds to meet unexpected expenses. However, a disciplined borrowing strategy can help you avoid the burden of substantial interest expenses over time.
For instance, if you are borrowing funds to expand your MSME business, you must first estimate the cost of this expansion. Calculate the overall cost of leasing a new property, procuring more inventory, hiring staff, utilities, and other overheads. Once you have a figure in mind, factor in your revenue and cash flow details. This will help you understand if your monthly/quarterly cash flow is enough to service the debt. Borrowing more than your requirement can cause severe issues at the time of repayment due to the high EMI amounts.
Build a Foolproof Repayment Plan
As a young entrepreneur, you should not ignore the importance of a well-defined and foolproof repayment plan. Most first-time borrowers and young MSME owners tend to think about repayment only after they have secured the loan. This can result in repayment issues down the line. Missing payments or defaulting on the loan negatively impacts your credit profile. As MSME loans are collateral-free loans, lenders base the approval decision on the credit history of the borrower. Therefore, defaulting on the loan will make it difficult to get loans in the future.
One of the most effective tips is to establish a solid and practical repayment plan before applying for the loan. This offers you a roadmap to servicing the outstanding dues. When drafting your repayment plan, you should have clarity on your existing expenses like overhead costs, supplier payments, salaries and wages, etc. Accounting for these expenses helps you estimate how much you can realistically pay the lender.
Conclusion
The tips outlined above can help young entrepreneurs easily secure an MSME loan from a lender of their preference. By checking your eligibility, preparing a document checklist, defining your loan purpose, borrowing only what you require, and drafting a comprehensive repayment plan, you can simplify your MSME loan journey. These easy tips can help you gain easy access to credit, making it easier to grow and expand your MSME.
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