Funding problems are an integral part of the entrepreneur experience. Doesn’t matter if you’re a bumbling novice with a head full of dreams or a seasoned shot caller with years of experience under their belt; financing a business is an ongoing process, more so for an MSME.
Although there are several institutions one can approach, there is a strict screening process to reduce the chances of moral hazard and adverse selection. Here are a few tips that can help you increase your chances of getting an MSME loan from your institution of choice quickly and at favorable terms.
6 Simple Tips to Boost your Eligibility for an MSME Loan:
- Proper Business Plan
Lenders are careful with the clients they deal with since they’ll be lending their money out to them. A solid business plan is one of the first things that an entrepreneur is asked for while applying for an MSME loan for a new business. A new entrepreneur is, in fact, at a disadvantage as compared to a seasoned entrepreneur since they have nothing to show except a blueprint for the business they’re planning to set up. Hence, to make an impression, they have to prepare accordingly and present a detailed business plan.
- Managing Cash Flow
Cash flow refers to the amount of money that the firm is receiving and expending daily or quarterly to run its operations smoothly. It is seen as one of the most accurate indicators of a firm’s health, and hence, is something that lenders generally hold in high regard.
Lenders are generally interested in the firm’s liquidity: its ability to pay off loans with its assets, one of which is cash. Hence, entrepreneurs must maintain a good cash flow as much as possible by teaching habits like payment discipline, reducing overheads, and streamlining expenditure.
- Improve Credit Score
When people wonder about how to get an MSME loan, they usually forget about the fundamentals. Having a good credit score is paramount to skipping the long line and inquisition and quickly landing a loan, whether personal or business. The credit score tells the lender about a borrower’s creditworthiness, judged based on their past credit history as well as income and taxes. To maintain a healthy credit score, one must keep an eye on the level of debt the company is getting into, monitor the repayments and ensure they’re timely, pay their taxes on time, and try to limit the request for new credit as much as possible.
- Low Credit Utilization
Having a low credit utilization is a hit when it comes to applying for MSME loans. The credit utilization ratio tells the lender how much of your available credit is used in the business. It is calculated as the ratio of the credit utilized to the total credit available.
Keeping a lower credit limit tells the lender that you’re keeping your credit use in check, are maintaining a good cash flow for financing your operations, and help keep a healthy credit score. The general consensus on a good credit utilization is approximately 30% or less.
- Having Proper Documentation
Applying for loans is an easy task if, and only if, an entrepreneur has the proper business loan documentation. This goes not only for new entreprneurs, but for those with existing businesses, who are new to credit. With the regulatory system being so sluggish in a country like India, most MSMEs are not formalized. This keeps them from reaping the benefits of the several low-interest loan schemes that the government and other agencies have to offer since a business has to be registered. The registration process requires a KYC process with proper documentation.
Now, businesses can formalize quickly by logging on to the government’s online MSME registration portal and getting themselves registered.
- Repayment Strategy
Prioritizing the repayment strategy for the loan is a key step towards acquiring the borrowed amount quickly. Not only is repayment of the loan a topic of extreme interest and importance to the lender, but having a repayment strategy also exhibits that the entrepreneur has a plan and has given thought to the business and its future, which is the mark of a good businessperson.