Business

Common Problems MSMEs are Likely to Encounter While Seeking Loans

By January 9, 2021 No Comments

MSME loan

The MSME sector in India comprises around 55.8 million enterprises, of which approximately 14% are women-owned. This sector generates employment for about 124 million individuals and contributes 45 percent to exports and 31% to GDP.

However, despite holding a significant position in the Indian Economy, this sector is unable to perform to its full capacity due to a lack of formal credit.

Financing is one of the major challenges businesses in the SME sector face as lenders are reluctant to lend to small and micro units as they are highly susceptible to market-linked risks. Some of the main issues that firms may encounter while applying for an MSME loan are as follows –

  • Cost of funding

Businesses usually require funding of around Rs.5-10 lakhs. Since the cost of funding such a small loan amount is quite substantial, financial institutions reject such loan applications.

  • Lack of collateral

Most micro, small and medium businesses do not own any collateral of substantial value. Consequently, they also fail to qualify for a business loan of considerable value. Lack of underlying security is also one reason why they are considered high risk by financial institutions.

  • Significant interest rates

Since lenders perceive micro and small enterprises as high risk, they charge a high-interest rate on business loans. Accordingly, many MSMEs cannot opt for a business loan as they cannot afford such high-interest rates.

  • Lengthy processing

Conventional business financing involves a lengthy processing period as financial institutions ask for a number of documents for verification. Accordingly, micro and small enterprises may lose out on valuable opportunities for expansion and growth. Moreover, financial institutions also set stringent eligibility parameters which make it difficult for small businesses to qualify for a business loan.

Consequently, businesses should consider opting for MSME loans from NBFCs that come with nominal processing and instant approval.

  • Lack of a proper business plan

A business plan is one of the most crucial documents required by financial institutions as it enables them to assess the business’s viability. It will also allow them to ascertain whether the company will pay back the loan on time. However, most small businesses do not have a proper business plan, so they fail to qualify for a loan.

Tips to get approved for MSME financing quickly 

Applicants planning to apply for financing can go through the tips below to improve their MSME loan eligibility –

Tip 1: Improve credit score – 

Financial institutions refer to credit scores to assess the risk factor of an organization or individual and their capability to repay on time. Since most small businesses and start-ups don’t have any credit history, lenders refer to the business owner or entrepreneur’s personal credit score to assess their repayment behavior.

Moreover, financial institutions may reject loan applications or charge a significant interest rate on borrowers with a low credit score. Consequently, prospective applicants should adopt suitable measures to ensure their business CIBIL score stays above 700.

Tip 2: Meet eligibility parameters

Prospective applicants should also go through the eligibility criteria specified by a lending institution before applying for a business loan.

Even though the MSME loan eligibility requirements may vary for each lender, there are some primary conditions that every applicant must meet. These are as follows –

  1. Applicant must be within the age of 25 to 55 years
  2. They should have a favorable credit history
  3. IT returns must have been filed for a minimum of one year
  4. They must own a business with a vintage of three years and more.

Tip 3: Submit the correct documents

Since the lenders sanction loan applications after verification of documents, applicants must go through the checklist for business loan applications. In case of incomplete documentation, the loan application will get rejected. Some of the essential documents that one must submit during MSME loan application include KYC documents, Proof of the existence of the business and financial documents.

However, some NBFCs also extend pre-approved offers to borrowers which remove hassles and accelerate the application procedure. Such offers can be availed on a range of credit products such as personal loans, business loans, credit cards, etc. One can easily check his/her pre-approved offer by entering the name and contact information.

Additionally, applicants should go through the terms and conditions prescribed by the lending institution before opting for an MSME loan. It will enable them to avoid complications later.

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