The MSME sector significantly contributes to the country’s growth. It helps improve GDP and plays a role in job creation. However, the sector faces challenges when it comes to accessing funds. The situation is much worse in remote areas, where most small businesses depend on money lenders and traditional lenders for capital infusion, even though they have all the necessary documentation to make them eligible for business funding.
To help such businesses with their funding needs, we have created a guide on how MSMEs can apply for a business loan, the eligibility criteria, and what documents they should have. Let’s get started.
Step-wise Guide to Applying for MSME Loans
The application process varies slightly with different lenders. Here are the common steps to give you an idea.
- Step 1: Open your web browser, type your preferred lender’s name in the search bar, and click on their official website.
- Step 2: Move to the product section on the homepage and tap ‘Business Loan’.
- Step 3: Tap on the ‘Apply Now’ option at the bottom of your smartphone screen.
- Step 4: Tick the ‘Business Loan’ checkbox and share your email address, name (as on KYC papers), and phone number. Next, click on ‘Submit’.
- Step 5: Enter the OTP received on the contact number you provided.
- Step 6: A lender representative will contact you to discuss your requirements and guide you through the next steps.
Eligibility Criteria for MSME Loan
Review the following criteria to check if you qualify for MSME loans online approval.
- Who can apply?
- Self-employed professionals like Chartered Accountants, architects, doctors, etc.
- Self-employed non-professionals like manufacturers, traders, shop owners, etc.
- Business Type
- Private Limited Company
- Sole Proprietor
- Unlisted Public Limited Company
- Partnership Firm
- Age
- As a business owner, your age should be within the 21-65 years bracket.
- Business Vintage
- Your existing business must not be less than three years old.
- Minimum Turnover
- Your business must show an annual turnover of at least Rs 40 lakh.
- The profit should not be less than Rs 3 lakh.
- You must have a current account in the name of your entity.
Documents Required for MSME Loan
You must keep the following documents handy to ensure you receive immediate approval for a loan for business.
- KYC Documents
- PAN card in the name of the company
- Business Registration Certificate
- Income Documents
- Furnish the company’s financial statement for the previous six months. You must provide a balance sheet, cash flow statement, and income statement.
- Income tax returns of the recent few years
- Business continuity proof
- Other Documents
Depending upon your business profile and the risk involved in lending, the lender may ask for the following documents:
- Business blueprint detailing workflow
- Information on top management
- GST returns (if your business exceeds the minimum GST threshold limit)
Factors Affecting MSME Loan Approval
MSME loan approval not only depends on meeting the minimum qualifying criteria and having the necessary documents; you must also consider the following:
- Visit the credit bureau website and review whether the three-digit score matches the lender’s qualifying criteria. Check for errors in your business information and ongoing debts. To ensure soundness in your business creditworthiness, refrain from relying on revolving credit like business credit cards and avoid using over 30% of your total available limit.
- Apply only for the amount you actually require and what you can afford. Applying for excess funds can disrupt your cash flow, and you may default on your payments or fail to meet your business operational expenses.
- If you have multiple debts of different forms in your company’s name, try to close a few of them to improve your company’s debt-to-revenue ratio and avoid loan rejection. Ideally, your debt-to-revenue ratio should be below 50%. You can compute it by dividing all your existing EMIs by your monthly revenue.
- Apply with a maximum of two lenders at a time. Every time you submit an MSME loan application, the lender requests your detailed financial behaviour from the credit bureau. This request is recorded on your credit report as a hard enquiry and slightly impacts your credit score. However, if there are multiple hard enquiries, you will be regarded as a credit-hungry entity, and as a result, not only will your credit score deteriorate, but you may also face loan rejection.
- If you do not meet the lender’s qualifying conditions on a few parameters, it is best to provide collateral. If you run a partnership firm, it is best to introduce your partner as a co-applicant on the application form. Both of these actions will reduce the lender’s risk and make getting approval easier.
Conclusion
Obtaining an MSME loan is crucial for the growth and success of small businesses. As a business owner, it is important to compare the eligibility criteria and documentation of different lenders and apply to the one that suits your profile. Additionally, you should review your credit report and debt-to-revenue ratio and try to improve them before submitting your application.