Tips For First-Time MSME Borrowers
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MSMEs are the backbone and growth accelerators of the Indian economy. The survival and growth of the MSMEs itself are dependent on their access to credit. Every business needs capital to grow. Apart from managing the daily working capital needs, a business owner always strives to grow and expand his enterprise. Securing the right funding helps in sustainability and longevity of any business.
Banks/NBFCs have many products curated for meeting capital needs for different businesses and one must meet a certain set of requirements to avail these. Lenders deploy a host of assessment methodologies to appraise an MSME borrower, combination of financial assessment and the personal discussion. Depending on the scale and life stage of the MSME, the assessment may have more of one element and less of others. This also depends on the philosophy and thought process of the lender.
Lenders are more focused on data-based assessment and may be digital in their approach as against some others who evaluate and profile hard file of the customer basis their read of customer’s business during their visits, personal discussions. Lenders gauge the operations by observing the business, conducting reference checks and understanding their overall ecosystem.
There must be a ton of question that every first-time borrower of SME loan has on his mind. Most struggle to understand the process and preparedness it requires to successfully procure credit from banks and NBFCs. Here’s all one needs to understand before proceeding with that loan application.
Ascertaining the need: Purpose & quantum
It’s crucial to measure correctly the scope and size of the funding that you require. It may be for that new machine that the business is planning to buy to boost production or for procuring inventory during the festive season to leverage extra footfalls. One must also evaluate the repaying ability. It’s easier to convince a lender if your objective for borrowing sounds legit and pragmatic.
Secured vs unsecured
For business owners who have a good asset base and are sensitive to interest rates, secured loans like loan against property, cash credit, gold loan, funding against equipment or vehicles are the best options. These are also available for a relatively longer tenure. On the other hand, Business owners low on assets but with sound financials can go for unsecured form of credit like business loans, merchant cash advance, overdrafts, etc., which may come at a higher cost and for a shorter tenure.
Thus, the availability of collateral and willingness to offer the same as security plays a crucial role in deciding between the two types.
Ease of access
Other than interest rates and fee, which depend on economic considerations, the speed and convenience of obtaining loan also affect the choice of lender that one may want to go for.
Documents are the most important part of the loan application. One must have a clear set of documents related to business ready at all times. This makes the lender’s job easier and raises the lender’s confidence in the overall conduct of business. Documents are broad of two types:
KYC related: These include KYC of the entity as well as promoters:
- All identification and address proofs of the individual such as PAN card, Aadhaar card, passport, electricity bill, water bill, telephone bill and rent agreement (in case the house is rented)
- Documents related to business such as registration certificate, shop and establishment Act certificate, MOA/AOA, partnership deed, entity PAN, etc.
Financial assessment-related: There are direct as well as surrogate methods being used by lenders to assess the financial viability of the borrowers:
- Complete financials, if available, act as direct means of assessing cash flows of the business.
- Bank statements, GST returns are used as supporting docs to validate incomes in an alternate manner. Lenders offer elaborate loans basis analysis of these docs even if the financials are unaudited or understated
- Proof of payment of statutory dues such as GST return, VAT return, conversion charges, etc.
In case of a secured loan, the title and other documents related to the security under question becomes an important part of the documentation.
Good credit history
Checking the credit history of the borrower has become one of the most important tools for financial institutions. “Past behaviour is the best predictor of future behaviour”, lenders subscribe to this rule to judge the intent and willingness of the borrower to pay. In absence of a reasonable business credit history for a small and upcoming business, the personal credit history of the individual becomes the deciding factor. Remember to pay your credit card bills on time.
Customer visits/personal discussions are an imperative part of the credit appraisal process. The lenders draw significant comfort and valuable information about business and its operations during these discussions. A crisp, concise and transparent conversation goes a long way in enhancing lender’s confidence in the business under evaluation.
Choosing the right lender
Gone are the days where options were scarce and not reachable. Careful research is required to choose the right lender. Most important is to carefully understand the product they are offering and the terms and conditions associated with it. A deal done in haste might leave you baffled over issues like charges, rate of interest, etc.
Above all the intense competition between financial institutions sometimes favours the customer & they might get more loan offers than required. For choosing the right offer with correct pricing one must have a clear knowledge of funding requirements and repaying capacity. The borrower must plan his capital requirement carefully so that they can fulfil the objective who don’t end-up biting more than he can chew.