Before addressing the common issues, MSMEs face while availing a loan, gaining an idea of what MSME is would prove beneficial in better understanding.
MSME refers to Micro, Small and Medium Enterprises. This sector is crucial for economic growth as it contributes to about one-third of India’s GDP. MSME owners often require funds to meet several business-related expenses, which is why they opt for loans. However, there are certain challenges that these enterprises would probably encounter while acquiring loans.
Some challenges MSMEs would likely encounter while availing loans
Besides knowing what is MSME, a business owner must be aware of the challenges these enterprises face while getting loans. These are illustrated as follows:
Absence of a proper business plan
A majority of the small business owners do not know how to present a proper business plan convincingly to convince lenders. The concerned financial institutions look into the plan for assessing how well the business is going to perform. Along with this, they also gauge the capability for loan repayment.
Hence, individuals must present a detailed plan which gives a projection of the investments and expected ROI. They must develop a target-based plan considering the current market landscape. It should map the growth chart and future prospects of an organization.
Lack of collateral or security
MSME owners usually don’t possess any assets for offering as collateral to financial institutions. This makes it difficult for securing a large sum.
In such scenarios, one can opt for collateral-free loans. Here, the financial institution will look into the borrower’s credit history for ensuring that they can repay the loan. NBFCs like Bajaj Finserv offers collateral-free business loans with minimal eligibility. Following are some of the basic eligibility criteria that business owners need to fulfil:
- The age of applicants should be between 24 and 70 years.
- Must have a business with a vintage of at least 3 years.
They also provide pre-approved offers, which help in simplifying and accelerating loan processing. These offers are provided on various financial products like business loans, personal loans and more. Individuals can check their pre-approved offers by providing a few details such as name and contact number.
High rates of interest
Especially when a business is new and lacks collateral, the financial institutions offer high interest rates and additional charges on the business loans. Resultantly, paying monthly instalments can prove to be stressful in such cases.
Thus, MSME owners must compare several lenders to zero in on the best interest rate and a suitable tenor for the business loan. If they select a long tenor, the EMI would be less, but it will incur higher interest.
Having a good credit score will also help negotiate the rate of interest.
Long processing time
The Reserve Bank of India has taken measures for ensuring the MSME sector financing is encouraged.
Still, a majority of the traditional institutions continue to have a conventional approach involving a considerable amount of paperwork. This makes the approval process cumbersome and lengthy. Moreover, this extended time period can lead to the loss of some great opportunities because of a funds shortage.
If you are looking to build your business brand, consider looking forward to lenders with simple documentation and a faster approval process. Usually, borrowers need to submit only a handful of documents. It includes:
- Identity proof
- Address proof
- Financial documents
- Proof of business ownership
Besides, borrowers may have to present additional documents as and when required.
Inefficient cash flow management
Most MSME owners face issues managing the payables and receivables. This poor management of cash flow can pose difficulty for a business to stay afloat. It will also lower creditworthiness for lenders, and they may charge a higher rate of interest.
Individuals who already know what MSME is and are willing to start their start-up should monitor the cash flow regularly. They should cut costs when possible and seek an exclusive business loan for MSME to fulfil the business goals. Leading financiers offer this credit with several borrower-friendly features and benefits.
Hence, apart from knowing what MSME is, you also know the challenges these organisations face. So take steps to overcome these challenges to be a successful small business owner.