In India, micro-small-medium enterprises (MSMEs) are the lifeline of the economy. These industries are thriving in India because of the enormous demand and growth prospects of the world’s fastest growing economy. MSMEs provide work opportunities for skilled labour. But seeking loan for small business has never been a smooth ride. Therefore, the Indian government has formulated the Micro, Small and Medium Enterprises Creation (MSMED) Act, 2006, describing small enterprises as a business engaged in the manufacturing, trading or services sectors. But this act has been revised now.
As per the latest definition of MSMEs, micro units can have investments up to Rs 1 crore and a turnover of less than Rs 5 crore. The investment limit has been raised from Rs 5 crore to Rs 10 crore for the small units with less than 50 crore turnover. The enterprises with investments up to Rs 20 crore and a turnover of less than Rs 100 crore will now be called medium units. Earlier the MSMEs were defined based on the investment, but now they also include the company’s turnover.
Loans for Small Business: Why are they necessary?
The backbone of every company’s success is finance, and this is particularly true for small businesses. In order to purchase equipment, refill inventory, extend operations and increase turnover small businesses need working capital. These days, there are tailor-made loans for small business owners known as MSME loans. They are preferred most amongst various other funding options available for securing a loan for small business.
However, You Should Keep in Mind these Points Before You Apply for a MSME Loan for Small Business:
- It is of utmost importance to get your MSME registered. You can fill out an online registration form under the Udyam Registration system (https://udyamregistration.gov.in/) to get your MSME registry completed. Registration for small business is quick, and you do not have to pay any amount. After the document verification e, you will obtain the certificate on your registered email id.
- Obtain a Business Registration document per your type of business, for example, Shops & Establishment Certificate, FSSAI, Pollution Control NOC, Partnership Deed, etc.
- Cash flow is another important aspect that cannot be ignored.
What is the cash flow?
A cash flow is a measure of how much money you have in hand to repay a loan. It is typically the first thing lenders look for when assessing the company’s financial health. A crucial parameter that most lenders can’t afford to ignore is inadequate cash flow. Therefore, deciding whether you can afford a loan is the first thing you should think about.
- Review your Credit score (CIBIL) score before making an application of a loan for a small business. One of the instruments lenders use to assess the reputation of a borrower is the CIBIL score. You might be denied a loan if your report indicates a lack of diligence in paying back debts in the past.
- Small business owners must be vigilant in keeping their financial reports in good condition (receipts, accounts, invoices, sales orders, lading bills, and such). Many lenders are specific about proper documentation; thus, proper paperwork would be necessary when applying for a small business loan.
- Just like every organization is different, so are the needs for financial resources. There are numerous loan products available. If you are looking for special rates and conditions, you have various means of obtaining loans. Asset purchase, working capital and line of credit are some of the loan options you can explore.
- Moreover, always check for the eligibility criteria before applying for a loan for a small business to minimize the chances of rejection. Some of the common parameters that almost all the financial lending institutions look at are considering minimum age requirements, minimum operational months and the minimum amount invested.
- Another important tip would be not to postpone or miss repayment of current debts, even though you are taking out a new loan for small business. It affects your credit score and financial goodwill negatively.
- Lastly, one should think beyond banks as a source of loan for small business. With the digital economy taking off, it is now possible to explore other reliable alternatives such as NBFC (non-banking financial companies).
The Growing Popularity of Private Lending Institutions:
MSMEs are known as the growth drivers because they contribute to one-third of India’s GDP. Although previously banks were the stronghold of lending for small businesses, now NBFCs have stepped up their presence in this segment. Due to banks’ tightened regulatory standards, stringent paperwork requirements, and the need for property collateral to secure loans, many entrepreneurs have turned to NBFCs to get loans for their small businesses. It would be best if you opt for reputed financing institutions like Kinara Capital. They are transforming lives and local economies in India. They provide hassle-free, quick, and flexible loans for small businesses without land collateral.
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