By Mehernosh Tata, Globally, the Micro, Small and Medium Enterprises (MSMEs) segment plays a crucial role in employment generation, driving innovation, GDP growth, and augmenting overall economic activity.

In India, this segment constitutes a vast network of over 63 million units, employing around 111 million people. The MSMEs also contribute significantly to the country's GDP, as the share in pie stands at about 30 percent. (Source - Mint Street Memos by RBI, August 17, 2018)

In short, the MSME segment is one of the most potent engines of the economy and it would not be wrong to state that funding them could fuel India's growth. Yet, MSMEs are deterred by lack of access to a quality credit line for investing in business and expansion plans, often, derailing the entrepreneurs from their vision.

Sluggish credit growth also attributes to lack of awareness among business owners regarding the requisites to avail a business loan. As a result, the acceptance rate for loan applications and ultimately credit growth tends to slow down.

If you are a business owner, here are the key aspects to consider when applying for a business loan ranging from Rs. 2 lakh to Rs. 50 lakh.

Healthy Credit Score

Your credit score is a reflection of your repayment pattern and credibility. As such, the lenders can have a fair idea of the credit risk involved in sanctioning a loan to you and your business through the credit score. It makes sense to maintain a healthy credit score while availing short-term loans or credit card facilities. In fact, some lenders also provide better interest rates and services for customers with a good credit score.

GST and Other Statutory Registrations

GST and other statutory registrations for the business provide a compliance check to your business. Lenders derive comfort when sanctioning a business loan to an entity registered within the statutory framework as required.

Audited Financial Statements

The audited financial statements help the lender to assess how well the business has been managed financially. Lenders are more inclined to sanction you a loan if your business has been profitable and generating operational cash flows on a consistent basis. Also, one should be cognizant of the audit qualifications in their financial statements and taking necessary corrective actions to avoid repeat qualifications.

Profitability and Taxes paid

If your business is profitable, it reflects that company has enough liquid capital to pay back a loan. Hence, the profitability of operations and regularity of taxes paid can impact your eligibility and quantum of loan that can be sanctioned for your business.

Bank Statements, Lenders tend to assign weightage to the assessment of your bank account, as it reflects the actual cash flows into the business from sales and also tracks your cash commitments in terms of loan EMIs etc. 

With the advent of technology, it has now become possible to analyse the bank transactions to throw meaningful light into the repayment capacity of the MSMEs. Several fintechs and banks today offer business loans basis this technological advancement. As such, the primary inflows and outflows into the business should ideally be routed through a single account.

Reach out to your existing banker

It is advisable to first reach out to the existing bankers where one is holding a savings or current account. The existing banker already has first-hand information of the conduct of your bank account and cash flows and thereby would be able to offer better terms as well as options in terms of availing a business loan from them.

Longevity of Business

The sustainability of the business is a result of fulfilled customer demand, well-charted growth strategies, and understanding of the marketplace. While even an individual without credit history may be able to avail credit today, albeit, at a higher cost, years in the business improve your chances of the loan getting sanctioned easily.

Realistic Projections

The future projections and expansion plans submitted to avail a business loan should be realistic, supported by fair assumptions. The fairness of the assumptions renders reliability of your repayment ability through business cash flows.

Loan Tenure

It is not necessary that you must avail the highest permissible loan. Instead, apply only for the amount and tenure as genuinely required, such that you can repay the loan through business cash flows.

End use of Funds

Any funds disbursed for the business must be utilized for the business only. Lenders highly insist on documenting the proposed end use at the time of processing of the loan application and post disbursement, on tracking the utilization of these funds.

A responsible credit behaviour goes a long way in portraying you as a reliable business person and also helps in accelerating your application process and loan sanction. So, while you keep these aspects in mind, act responsibly in your credit practices to keep thriving in your business.

(The writer is Head, Edelweiss SME Lending division)

Published On : 03-05-2019

Source : Times of India