Small and medium enterprises (SMEs) have a huge role in driving innovation, job creation, and economic growth in India. Being a small business owner can be a rewarding experience – you get to be your boss, select the industry you wish to work in, and the types of goods or services you wish to provide. However, SME owners deal with their fair share of challenges. Accessing adequate funding to support your business growth and expansion initiatives is one of the major ones.
As a business owner, you have the responsibility to ensure that your SME has adequate funds to cover its expenses and invest in growth. Unexpected expenses, late payments from clients and customers, as well as fluctuations in revenue can impact your cash flow. Cash flow issues worsen as inflation and price pressures affect your key inputs. In such a situation, applying for an SME loan would be the simplest way to meet your immediate business working capital needs.
Characteristics of SME Loans
- Loan size: SME loans have a maximum loan size capacity. It would depend on the type and classification of the SME (be it a micro, small, or medium business).
- Purpose-specific loans: Lenders typically provide SME loans tailored to specific purposes. Based on your needs, you may avail of the loan for business expansion, working capital, machinery purchase, and more.
- Collateral requirements: Several SME loans require collateral in the form of assets like equipment, machinery or property.
- Interest rates: Interest rates on SME loans would depend on the policies of the lender and the creditworthiness of the borrower. These loans can have either fixed or floating interest rates.
MSME Loan Eligibility in India
Micro, small, and medium enterprise or MSME loan eligibility in India depends on several factors: –
- Creditworthiness: Your credit history and ability to repay the loan would be among the prime factors assessed by the lenders.
- Business stability: The lenders would take the age, stability, and financial track record of your business into account.
- Purpose of the loan: The purpose of the loan impacts its eligibility. MSME loans can be used for business expansion, working capital, machinery purchases, and more.
- Financial health: The lenders may assess factors like your business turnover, profit margins, and debt obligations, before granting the loan.
- Collateral: In certain instances, collateral might be needed for a small business loan. The lender would assess whether your collateral meets their requirements.
- Housing/business premises: If you live in your house or own your business premises, you would have higher odds of getting your small business loan application approved.
Meeting the MSME loan eligibility criteria and submitting a properly filled-up loan application along with the necessary documentation helps improve the odds of securing financing. With a bit of preparation and strategic planning, you can position yourself as an ideal candidate in the eyes of the lenders.
Maintain a High Credit Score
One of the first things that a lender would check when reviewing your loan application is your credit score. The score reflects your creditworthiness and has a direct impact on your overall SME loan eligibility. The higher your credit score or rating, the better your odds of getting the loan approved. You must aim to score above 750. To improve your credit scores, it is vital to pay your credit card bills and EMIs on time. Additionally, you should keep checking your credit report regularly for errors or discrepancies.
Manage Your Cash Flow
Cash flow management is an important aspect of running a business. Lenders often evaluate the business cash flow to assess the repayment capability. Positive cash flow shall reflect the ability of your business to generate ample revenue to handle debts and meet operating expenses. You should try to maintain clear and consistent cash flow records that highlight the financial health of your business to improve loan eligibility.
Cutting down on unnecessary expenses and ensuring a steady flow of income can have a positive impact on your cash flow. A well-managed cash flow is likely to be an indication of financial stability and assure the lender that you would be able to handle EMI payments even during challenging times.
SME loans are a widely used financial tool that helps support the operational and growth requirements of small and medium-sized enterprises. They serve as catalysts for business expansion and can assist your business in navigating diverse challenges and seizing opportunities.
Before applying for an SME loan, you must check whether you meet the eligibility criteria set by the lender. While the exact requirements can vary between lenders, your creditworthiness, collateral, and financial health would impact your chances. Taking steps to improve your credit score and properly managing business cash flow can help improve your small business loan eligibility.
Author bio: The author is a financial consultant with experience working in the industry for several years. In his free time, he likes to write and impart knowledge on financial services.