Growing at over 10% a year, the MSME sector in the country provides employment to around 120 million people according to the Confederation of Indian Industries. While several government policies have helped in the expansion of this sector, it is the easy availability of funds via MSME loans that helps in their financial well-being.
What is MSME according to the new definition?
Citing economic slowdown, the Union Government revised the definition of MSMEs during the ‘Atmanirbhar Bharat Abhiyan‘. Now, the sector is defined based on investment limit and annual turnover. This new information is essential for business owners who want to get an MSME loan for expansion.
According to the new definition,
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Micro units
Investment = Rs.1 crore and turnover = below Rs.5 crore
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Small units
Investment = Rs.10 crore and turnover = below Rs.50 crore
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Medium units
Investment = Rs.50 crore and turnover = below Rs.250 crore
How MSME loans help businesses in the country?
Due to its size and nature, the MSME sector faces several challenges in its working as it is more susceptible to economic shocks. Such companies rely heavily on working capital to meet their day to day expenses that they often do not have a legal fall back to recover invested dues. Hence, it is crucial to ensure that a business does not run out of working capital.
Mentioned below are four ways in which loans for MSME help operations.
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Boosts affluence:
An MSME loan helps avoid working capital scarcity. Quick access to funds enhances solvency, as these can be utilised to pay for expenses that cannot be delayed, e.g. payment of salaries, purchasing raw materials, and other overhead costs.
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Prevents slowdown:
In the event of the business running short on funds, they can approach suppliers with full payment, which would otherwise bring operations to a halt.
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Prepare for a crisis:
Apart from helping run the operations smoothly, ample funds ensure that the company is ready to face financial emergencies with ease. As a general rule of thumb, liquidity helps cushion against unforeseen situations. Preparing for a crisis is one of the many ways to be a successful small business owner.
Besides these, such a credit option helps maintain the company’s goodwill among the company employees, suppliers and traders by paying salaries and meeting overhead expenses promptly.
Why MSME loans are the perfect choice for businesses?
Now that we know how MSME loans help these businesses run their day to day activities, let’s take a look at what makes these credit lines so popular among small and medium enterprises.
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Quick disbursement
During a liquidity crisis, any small and medium business can find itself in need of surplus funds. Availing an MSME loan is often hassle-free and require minimum documentation. This means that companies can also meet seasonal demands comfortably.
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Control
Typically, one would approach venture capitalists or angel investors to obtain funds for operation, which can involve them seeking a control part of the company in return.
Unlike them, MSME loans are designed specifically to meet a small business’s demands and help them expand their operations. As such, one can avail these loans without having to liquidate control of the company.
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Collateral-free
Traditional financing institutes often reject loan applications from small businesses because they lack the creditworthiness to secure high-value credit lines. Moreover, small businesses often lack the assets to pledge as collateral.
To prevent falling productivity, small businesses also cannot pledge equipment and other valuable resources readily. In such a situation, MSME loans are a perfect choice as these loans are unsecured, and individuals can obtain funds quickly to meet short-term requirements.
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Growth opportunity
Businesses with a planned expansion are the ones to benefit the most from loans for MSME. Companies can tap into their growth potential; stock raw materials to meet seasonal demands with its help.
Moreover, they can also use the funds availed to expand operations and set up new processing facilities to tap into an even larger customer base. Thus, unsecured business loans provide growth opportunities increasing profitability in effect.
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Easier eligibility
Since these credit lines are mainly used to meet short-term demands, they offer a sense of flexibility to the borrower since they do not have to be committed to credit lines for a long time. Additionally, financial institutions often have relaxed eligibility criteria for business loans; small and medium enterprises can avail MSME credit in a hassle-free way with minimum documentation.
Several financial institutions like Bajaj Finserv also provide pre-approved offers to expedite the loan application process even further. Individuals and businesses can avail these offers on financial products like business loans, personal loans, etc. You can check your pre-approved offer by providing a few simple details like your name and contact details.
MSME loans offer a certain room for fund management, as businesses can refill raw materials and allocate the available resources efficiently, without stressing the payment cycle. This means that any company at any stage of growth can meet its specific demands comfortably.
