May 29, 2024

How to Overcome the Challenges Faced While Applying for MSME Business Loan

The MSME sector is an essential contributor to India’s economy. This sector provides employment to millions of people, significantly contributing to the country’s GDP. However, financing the expansion remains a significant challenge for MSMEs, preventing them from realising their full potential. Although the government has introduced new policies to fund MSME owners’ business requirements, accessing MSME or SME loans still poses some challenges.

This blog post will explore the difficulties encountered when applying for an MSME business loan. Before delving into that, let us understand what MSME business loans are and how they can be advantageous.

What is an MSME Business Loan?

MSME loan is a credit facility given to startup owners, business owners, entrepreneurs, self-employed professionals, and other business entities to expand their business. This loan helps these businesses to their meet day-to-day requirements. The maximum SME loan amount offered by financial institutions is up to Rs. 2 crores. The repayment tenure of up to 5 years is provided to the business owners, and the period may be increased as per requirements. MSME business loan interest rates may vary among lenders. The interest rate also depends upon the fund borrower’s profile and business requirements. Further, let us discuss the advantages of availing MSME loans.

What are the Benefits of MSME Loans?

Entrepreneurs are increasingly choosing business loans for MSMEs as an ideal financial product. Here are some of the benefits apart from being the perfect financial product:

1. Funds Needs

MSME owners often apply for business loans to fund necessary expenses such as rent, machinery, hardware, software, and employee salaries. Using MSME finance instead of personal finances is advisable for such expensive purchases.

2. Interest Rates

Small and medium-sized businesses are crucial for economic growth, which is why lenders offer the most favourable interest rates for MSME business loans. These loans offer lower interest rates than other types of loans, reducing the financial burden on the borrower. This means businesses can access more funds while spending less on interest payments.

3. Good Business Management

Every business has to face some challenges in the ever-changing market. If you are a small business owner, you may occasionally encounter financial difficulties and cash shortages. You might be forced to give up a portion of your company to investors or venture capitalists to raise funds. However, utilising MSME finance can help you maintain business control by delivering a positive money flow.

4. Collateral-Free Business Loans

One vital benefit of availing MSME business loans is obtaining a loan amount without the necessity for pledging any asset as collateral. SME loans are completely collateral-free and can be availed by any business owner with no high-value assets.

What are the Challenges Faced While Applying for MSME Business Loan?

It is time to discuss the key elements that cause significant difficulties in obtaining an MSME loan. Let us explore each of the top four challenges addressed individually.

1. Lack of a Clear Business Plan

Small business owners often struggle with creating a compelling project plan that will catch the attention of lenders. Financial institutions use these plans to evaluate the potential success of your business and its ability to repay the loan. To impress them and get MSME finance, it is important to provide a detailed plan that includes projected expenses and strategies for managing unexpected risks. To create a solid plan, consider mapping out your business’s growth and future opportunities while considering the current market landscape. If needed, seek assistance from a project planner who can develop a logical plan.

2. Inconsistent Cash Flow

Managing finances is the biggest issue businesses face, leading to cash flow and credit problems. To improve your financial situation, regularly track your cash flow, reduce costs where you can, and sell assets you do not need. For example, sell old equipment like fax machines if you mainly communicate online. Also, negotiate your lease terms and reduce landlines if your employees mostly use mobile phones.

Use mobile payment apps to receive funds quickly and consider asking for partial payments in advance for large orders.

3. Long Approval Process

The RBI has taken steps to encourage funding for the MSME sector, but many traditional institutions still rely on a lot of paperwork. This makes the approval process to get MSME finance lengthy and difficult. This can cause your business to miss good opportunities due to a lack of funds. To avoid this, look for financial institutions that require less documentation, have online applications, and offer quick MSME loan approvals.

4. Unaffordable Interest Rates

Small or medium business owners may not want to use traditional financial institutions for loans due to high-interest rates and extra charges. This is especially true if they are new. It is important to compare multiple lenders, including modern ones, to find the best interest rate and MSME business loan term. A longer SME loan term means lower monthly payments but higher overall interest costs.

Maintaining a good credit score can be helpful in lowering interest rates. Only ask for the loan amount needed, as higher amounts often come with higher interest rates.

Choose MSME Loan Lender Wisely!

As a small business owner, you might face some challenges when trying to secure MSME finance. However, it is essential to choose a financial institution that is forward-thinking and has your best interests at heart, like HDFC Bank. They understand the unique needs of every business owner seeking MSME finance and offer loans that cater to all your business requirements. With HDFC Bank, you can rest assured that your business is on the path to success.

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