Finance is a crucial aspect of business. Ever wondered why? Well, it is because just like we humans need food for sustenance, healthy financial backing is essential for businesses to sustain. Ample funds, healthy cash flow, and smooth operations indicate that a business is financially capable of growing sustainably. While it matters for every business, strong financial backing is essentially necessary for MSMEs.
As MSMEs continue to rise, coming across financial ups and downs frequently is imperative. Here, financial institutions, like banks, offer complete assistance in providing financial backing by offering loans. MSME business loans are one of the most effective ways of making business finances secure.
So, let us find out everything there is to know about how to apply for an MSME loan and how it benefits their business. Prior to beginning with the loan application process, let’s have some knowledge of these business loans.
Decoding Business Loans for MSMEs
Financial institutions put forth a range of services for MSMEs, and out of them, business loans are the widely availed ones for financial stability. An MSME business loan is instrumental in addressing various business needs, such as working capital, expansion, technology adoption, and modernisation of equipment. Sometimes, when you apply for an MSME loan, it may act as a life-saving ship to navigate through tricky financial situations and drive growth. Now, let’s explore a few types of business loans that banks offer.
Types of Business Loans for MSMEs
Here are a few MSME business loans that you may apply for as an owner looking for financial backing:
- Term Loans
Here is a popular form of business loan MSMEs vouch for from reliable banks. In term loans, the MSME receives the secured amount in a lump sum for a fixed term. Moreover, the interest rate is determined beforehand.
These business loans are generally secured for capital expenditure, such as purchasing machinery, infrastructure development, or business expansion. Furthermore, the repayment schedule is structured in instalments, which allows businesses to manage their cash flow effectively.
- Working Capital Loans
Working capital loans empower MSMEs to ensure smooth daily operations by keeping them financially backed. These MSME business loans are tailored to allow businesses to meet their daily operational expenses. It may include managing inventory, salary payouts, and other overhead expenses. Moreover, the tenure for working capital loans is usually shorter than that of term loans.
- Equipment Financing
This type of business loan MSMEs vouch for only when they need to purchase new equipment and or machinery. They allow businesses to stay technologically competitive in the market and enhance their productivity. The equipment itself serves as collateral, making it a suitable option for businesses looking to upgrade their operational capabilities.
- Trade Finance
Before knowing what trade finance is, it is necessary to acknowledge the fact that it is used by businesses involved in export-import activities. Such MSME business loans are available in forms like letters of credit, export credit, and invoice financing.
- Invoice Financing
Since a business requires financial assistance to convert its outstanding invoice into immediate working capital, invoice financing proves to be a resourceful service. An MSME business loan is especially beneficial for businesses dealing with delayed payments from clients. By leveraging their accounts receivables, businesses can bridge the gap between invoicing and actual receipt of funds.
- Government-Sponsored Scheme
Many governments around the world offer special schemes and subsidies to support the growth of MSMEs. These schemes may provide incentives to encourage entrepreneurship and innovation within this sector other than competitive interest rates, collateral-free loans, etc., offered by the banks.
Now that you have an idea about business loans and their types for MSMEs, let’s learn about how to apply for an MSME loan.
Understanding Business Loan MSME Application Process
Navigating the MSME business loan application process for MSMEs demands strategic planning. Remember, each lender may have specific requirements, so being well-informed and organised is key to a successful loan application.
- Preparation is Paramount
Before initiating the application, compiling business documentation is essential. This includes financial statements, tax returns, business plans, etc.
- Choose the Right Lender
Whether it’s a traditional bank, a government-backed institution, or an alternative lender, finding the best fit for your business is crucial.
- Determine Loan Amount and Purpose
A well-articulated purpose demonstrates professionalism and foresight. Whether it is for working capital or expansion, having a specific goal in mind aids in determining the loan amount needed.
- Creditworthiness and Eligibility
A positive credit history enhances the chances of MSME business loan approval. In addition, meeting the eligibility criteria set by the lender is important. This includes factors like business vintage, turnover, and profitability.
- Collateral and Guarantees
Depending on the type of business loan MSME, lenders may require collateral or personal guarantees. Collateral acts as a loan security item and assures the lender.
- Application Submission
Once you’ve understood how to apply for an MSME loan, compile all necessary documents into one folder and then apply.
- Review and Approval Process
Once submitted, the application undergoes review, and then the lender verifies the provided information. The process duration varies depending on the lender and the complexity of the application.
- Disbursement of Funds
Upon MSME business loan approval, the funds will be disbursed to your business account.
Reaping the Benefits of Business Loan MSMEs
When paving the way for successful business growth, financial assistance is necessary. MSMEs, while driving towards success, have to steer clear of tricky financial situations. In such cases, financial institutions play the necessary role in financially empowering MSMEs.
HDFC Bank, one of the most reliable banks, offers different types of MSME business loans. They offer several tailored packages for their customers, whether it is loan-term, repayment schedule, or any other thing. So, if you are an MSME owner and looking to secure an MSME business loan, book your call with a reliable bank today!