MSMEs are a collective term for micro, small and medium enterprises that are an essential part of the Indian economy. MSMEs contribute 30% of the country’s GDP (Gross domestic product), which accounts for 48% of exports and 45% of the country’s total manufacturing and services output. MSMEs came to be so defied after the introduction of the MSME development (amendment) bill in 2018. The government has taken several initiatives to increase the contribution of MSMEs to 50% of the country’s GDP by 2025. MSMEs are an employment-intensive sector and presently employ 11 crore people.
Making the Best use of loans
MSME loans are meant to boost the business, bolster the performance and help it to do well. These are the best uses of the MSME loan provided by banks and NBFCs.
- Working Capital Management – Working capital is a cycle of cash flow. The MSME takes a loan and proceeds to buy raw materials and consumables such as fuel and also pay other costs. Products are made and sold, and the payment goes into paying back the loan. A loan is taken for each cycle, and a portion of the profit is kept aside each time until the MSME becomes financially stronger and does not need a fresh loan for each production cycle.
- Purchase of technology and machinery – An MSME needs robust equipment to make high-quality products viable and competitive. Equipment and machinery are expensive, and the MSME loan is the best way to pay for new technology as well as technology upgradation.
- Inventory Management – Modern management practices focus on the constant reduction of inventory in the form of products, raw materials, and spares. Every company needs to be lean in inventory and operations, which is the core of modern supply chain management. MSME loans are invested in inventory management which helps bring costs down.
- Managing business debt – Everyone is always on the search for loans with lower interest, and old loans are paid with new loans at lower interest. Several small debts are closed and one loan retained for easy debt management. Not only is this convenient, but it also helps improve the business’s credit rating and helps it get more loans at lower interest.
There are several other government schemes for MSMEs, and the MSMEs need to register themselves in order to be eligible for these benefits, including subsidies.
Interest rates and other charges
There are interest rates, processing fees and other charges. These differ from Bank to bank and NBFC to NBFC, but a broad average has been tabulated below
To be eligible for an MSME loan, the first and foremost requirement is for the enterprise to be registered.
- The business needs to be at least 3 years old.
- The CIBIL credit rating score of the enterprise must be at least 685 points.
Other eligibility criteria include:
- The age of the entrepreneur applying for the loan needs to be between 25 to 70 years of age. The age of the entrepreneur should not, however, exceed 70 years during the time of maturity.
- The MSMEs applying for loans can be partnerships, limited liability partnerships, private limited companies and closely held.
- The applying MSME must have a CIBIL credit rating of at least 685.
The documents required for applying for an MSME loan with NBFCs are
- Proof of identity – PAN card, Aadhaar card, voter ID, passport, driver’s license
- Address proof – If the address is mentioned in any of the above ID proof documents, no additional address proof is required. If not, a telephone or post-paid mobile bill or utilities bill, rental agreement or lease agreement will qualify.
- Proof of business address – Rental or lease agreement, utility bill mentioning the business address.
- Proof of income – audited balance sheets and profit loss accounts of the MSME for the past 2 years.
- Securities or collateral – Though we do not ask for collateral, we require copies of the title deed or lease deed.
- Tax documents – PAN card, IT returns, GST documents.
How to calculate the MSME loan interest rate?
Most MSME loan providers have their own sites where there is an EMI calculator, and these calculators can be easily used to calculate the EMI payable based on the loan amount, the interest rate and tenure of the loan. While this method is convenient and easy to use, the interest rate being charged often does not feature and is not known.
The formula that is used for the EMI calculation is
EMI = P x r x (1 + r)n/(1 + r)n – 1
Where P is the loan amount or the principal sum, r is the interest rate, and n is the loan tenure.
Most online EMI calculators use this formula.
Dos and Don’ts while applying for an MSME loan
- Make sure the enterprise has been performing well for 3 years
- The entrepreneur needs to check the CIBIL score of the MSME and pay off old debts before applying for a loan.
- The business needs to have filed at least one year’s IT return before applying for a loan.
The MSME should not borrow from multiple lenders as this will bring down the CIBIL score.
The MSME needs to avoid going for a loan through brokers or agents as they charge a hefty sum to get loans approved. It is best to apply directly. The process is easy and does not need brokers.
- MSMEs need to be registered to get government aid and facilities
- The first step is to visit the site for udyam registration. New applicants for registration will need to select “new entrepreneurs who are not registered yet as MSME” and click.
- Registration is easy for entrepreneurs with a UAM (UdyogAadhar Memorandum). This is actually a one-page declaration of an MSME of its existence and basic details of the MSME. When this UAM was launched 36 million of the 42.5 million of India’s MSMEs were not registered. The UAM was easier to make, and this served as an interim document for an MSME to avail of MSME loans and other benefits.
- A request for OTP (One time password) will be generated on the registered mobile of the entrepreneur, and the OTP needs to be punched in. Once this is done, the entrepreneur will need to enter his or her Aadhaar number, PAN number and the details of his or her organisation.
- There will be another request for OTP after entering all the details of the MSME, and once this OTP is authenticated, the MSME is registered. Registration of the MSME is necessary for the enterprise to be eligible to avail of government aid and subsidies.
Most MSMEs require loans not only for a startup but for regular operations. Loans start with an interest of 7.5%, and the term of the loan depends on several factors, such as the financial condition of the MSME.
While NBFCs take care of the entire process of processing an MSME loan within a maximum of 3 days from the time of application.