MSME Funding: 3 Ways To Get Collateral Free Loan MSMEs largely depend on non-banking finance companies (NBFCs) for their credit needs

Micro, Small and Medium Enterprises (MSMEs) are the backbone of any economy, contributing significantly to gross domestic product (GDP), exports and job creation. In India, MSMEs contributed about 29 per cent to the GDP in financial year 2017, as per Small Industries Development Bank of India (SIDBI) report, making it a crucial driver of the country's economic growth.

But, the availability of adequate credit continues to be a major problem for this sector, restricting its growth. Banks are often reluctant to extend loans to small businesses because they do not maintain proper business related documents and books of accounts. In the absence of records, banks insist on collateral, which may not always be easy for such businesses to produce.

In the absence of formal lending options, MSMEs largely depend on non-banking finance companies (NBFCs) for their credit needs. Also, the government has announced several loan schemes tailor-made for this sector that allow them to borrow without collaterals.

Mudra and CGTMSE

Mudra was launched in 2015 to cater to micro enterprises in manufacturing, services and trading sectors. Micro businesses can avail small-ticket loans as per their credit need under three categories—Shishu loans of up to INR 50,000, Kishore loan between INR 50,000 and INR 5 lakh and Tarun loan from INR 5 lakh to INR 10 lakh. Mudra loans charge 11.5-20 per cent interest rate and offer repayment tenure of up to five years.

For bigger loans of above INR 10 lakh, Credit Guarantee Fund Trust For Micro and Small Enterprises (CGTMSE) scheme offers loans up to INR 2 crore to businesses in manufacturing and services sectors. Loans under CGTMSE also charge an interest of 11-19 per cent.

Most public and private banks, regional rural banks and co-operative banks provide these re-financing facilities. However, likewise regular loans offered by banks, availing loans under these schemes involve cumbersome paperwork and can take up to 45 days to process.

NBFCs

Fintech lenders and other NBFCs are addressing the problem of both credit as well as slow application approval for MSMEs. These platforms are leveraging technology to access the creditworthiness of borrowers and complete the loan disbursal process in up to seven days.

MSMEs in need of working capital can get small-ticket loans for a short-term period of up to three years. Businesses can also borrow against invoices of their orders if they are yet to get payment from clients. In such a case, these platforms give up to 90 per cent of the invoice value at an interest rate of 18-22 per cent, depending on the loan size. The borrower can repay the loan after he has received his payment from the client.

In invoice discounting loans, lenders rely on flow data instead of documents to gauge the creditworthiness of the borrower. "We look at flow information of the business like what kind of orders they place with their partners, order volumes and growth in those volumes, previous payment terms along with their credit footprint to understand their lending need and estimate our ability to lend to them," says Sangram Singh, President, Indifi Technologies.