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Small entrepreneurs can secure MSME loans by maintaining good credit, organizing financial records, exploring government schemes, having a clear business plan, and a repayment strategy.
Here are five simple, actionable steps that can improve your chances of getting a suitable MSME loan.
For a small entrepreneur, securing a loan can be intimidating, in terms of documentation and other lengthy processes However, if you are well-prepared and proactive in your approach, it reduces the complications and your chances to get credit. Small changes in how you present your business can make a huge difference in how lenders evaluate your application. As an MSME (Micro, Small, and Medium Enterprise) owner, it’s crucial to understand what lenders are looking for, and how you can make your case stronger. That way, your chance of receiving credit improves and so does your loan eligibility.
Here are five simple, actionable steps that can improve your chances of getting a suitable MSME loan. These tips will strengthen your loan application and help you get the funding your business deserves.
- Maintain a Robust Credit History
Your credit score is one of the first things lenders will examine. Your credit score vouches for your reliability and debt management ethic. A score over 650 makes you a low-risk borrower. However, the credit score is not the end of the world and lenders consider applications with lower scores provided you have a solid reason for the same. Monitor your credit report regularly and examine it for opportunities and errors. Get the errors rectified and leverage any opportunities where you can improve the score by paying off small outstandings, etc. With some diligence, you’ll find that improving your credit history can go a long way in securing loan approval.
- Organise Your Financial Records
Cashflow management is critical to business success and lending institutions attach high weightage to it. A positive cash flow indicates that your business can generate sufficient revenue to justify the operating expenses that include debt servicing expenses. If your business has a positive cash flow, leverage it by keeping updated books of accounts. Many NBFCs and fintechs have mastered cashflow-based lending, making it easier for MSMEs and underserved businesses to access the right financial solutions. This approach ensures credit reaches to the last mile and underserved sectors. Clear and consistent cash flow records will highlight your business’ financial health. Additionally, regular filing of financial statements, including income tax returns, balance sheet, etc., would help you score more points for staying compliant.
Take professional help if organising these feels overwhelming. Having clear and well-prepared financial records reassures lenders about your business’ financial stability. Also, it can go a long way in convincing them that you actually mean business!
- Explore Government Schemes
The Indian government has launched several schemes to make it easier for MSMEs to access funding.
Programmes such as the Pradhan Mantri Mudra Yojana (PMMY) and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) are designed to facilitate extension of loans at lower interest rates and with flexible eligibility criteria. These schemes can make the loan application process much easier for small businesses, especially for ones that are seeking collateral-free credit. By researching and applying for these government-backed schemes, you can increase your chances of obtaining credit.
- Have a Clear Business Plan
Think of your business plan as the blueprint for your business’ future. Lenders aren’t just giving you money, they are investing in your vision. A clear, well-thought-out business plan is one of the best ways to show them you know where you’re headed and how you plan to get there. Your business plan doesn’t have to be a huge document, but it should be detailed enough to cover your business goals, strategies, and loan repayment strategy. Having a strong plan in place gives lenders confidence in your ability to succeed, which could make all the difference when you apply for funding.
- Create A Repayment Strategy
Wherever possible, during the application process, show the lender that you have a plan in place to repay the loan. Demonstrating a well-thought-out repayment strategy can improve your chances of getting credit. It will motivate the lending institution to place faith in your business.
Your repayment strategy should comprise of a detailed timeline of your sources of earning surplus to service the loan. For instance, if you have secured a big contract that will enhance your cash flows, mention it to the lender. Similarly, if you are in a retail business and are expecting a robust festival season due to certain favourable factors, express the same to your lender. A possibility to prepay or having a secondary source of income can also work in your favour. Ensure that your repayment strategy is realistic and achievable based on your current financial standing. It reduces the loan provider’s perception of risk.
The above tips can help you access credit and make your application stronger. With diligent preparation and focused effort, you can obtain the funding that will enable your business to grow and thrive.
By Monika Kapoor, Chief Business Officer – Intermediary Business, UGRO Capital
The views expressed in this article are those of the author and do not represent the stand of this publication.