The Micro, Small and Medium Enterprise (MSME) sector accounts for more than 80% of businesses in India and employ approximately 117 million people. They also account for over 40% of manufacturing output and exports.
While MSMEs have the potential to be a significant source of entrepreneurship and paid employment, inadequate access to finance turned out to be the biggest impediment to their growth. This further affected their competitiveness, the ability to respond to changes in the economy and the creation of jobs. As per a census in 2006-07, more than 85% of the MSMEs were self-financed and did not have access to institutional SME financing in India.
Notwithstanding the slow pace of development, things have improved a good deal. The progress of digital technology has helped in expanding the credit and finance industry. Where the traditional banks and lending institutions could not cater adequately to the needs of small businesses, the newly emerged FinTech sector came to their rescue.
An acronym for Financial Technology, FinTechs are non-banking finance companies (NBFCs) that work on a peer-to-peer lending model. Their ecosystem is rooted in the principle of integration and association with other organisations, including financial institutions and venture capitalists. A wide network of stakeholders enables them to be flexible lenders for MSMEs and professionals.
Competing with the FinTechs, banks and traditional NBFCs have also started marketing their loans for small business more aggressively. The Make in India campaign is another factor currently contributing to the growth of SME finance.
Businesses that are recording a rising demand for their products and services can leverage such success to apply for SME financing in India and develop their venture further. To choose the best source of the loan, it is also good to make comparisons on various fronts.
Here are some questions to ask before you select a lender for your commercial loan:
How old should my business be to qualify for a loan?
The ‘years in business’ is a vital parameter that makes an SME eligible for commercial loans. The policies of banks, NBFCs and other lenders vary in this regard. A majority of the public sector and private banks want to play safe by lending only to businesses that are three to five years old in this industry. Young ventures are not looked upon as reliable borrowers.
Thanks to the FinTech revolution, however, small business loans in India are also open to startups as young as one year old. Therefore, if you have only 12 months of continual yet progressive operational history to show, you can get funds from a FinTech company.
Will I need to submit the application in person or can this be done digitally?
As an entrepreneur or business manager acting on behalf of your managing director, you have a multitude of responsibilities and may not have time to visit banks or NBFC office branches to discuss your loan requirements and submit an application. True, it is the borrower’s responsibility to ensure that she/he gets the loan securely from an authentic source. However, if the loan is available digitally on an encrypted website from a trusted lender, wouldn’t you rather use this process than keep visiting and revisiting offices to fill in a loan application?
FinTech companies have remodelled the application procedure for SME financing in India. They have made it simpler and safer to apply for loans online and get the decision instantly. If the borrower fulfils the eligibility criteria and has submitted the soft copies of all the essential documents with the application, the approval notification comes in minutes and the funds reach the concerned bank account in two to three days.
What documents will I need to submit with the application?
It is good to know about the supportive paperwork because these may vary according to the type of business you own or operate. Generally, the lenders ask for KYC documents, which include a copy of the business registration certificate – this tells about the exact years for which the business has been operating. Other KYC submissions can be the ID proofs of owners such as their PAN card and Aadhar card copies.
Financial statements such as the Balance Sheet and Profit and Loss Accounts are also looked into by the banks and FinTech companies. Businesses also submit their tax return proofs and bank account statements to substantiate their application.
Do I need to pledge collateral?
This is an important question to ask. When you take a car loan from a bank, your new car gets hypothecated to the bank till the loan is fully paid off. For taking a home loan too, you are asked to pledge the property for security. Collateral is also a reality for SME financing in India. Institutional lenders ask for a valuable asset to be pledged to them till the amount is repaid.
You can get a collateral-free loan, also called unsecured loan, from a FinTech company. From this source, the funds are sanctioned on the basis of your business’s credit worth. Talk to the organisation’s customer service team and check their website for more details on this category of loans.
Other than interest, what charges will I be expected to pay for the loan?
To determine your repayment capacity, it is good to have the exact account of the loan’s cost. Along with the interest rate, inquire about the loan processing fee, insurance premium if any, the prepayment penalty and hidden charges such as the documentation fees and legal fees, among others.
As a relief for borrowers, the loans from most FinTechs come only with interest, processing fee up to 2% and prepayment penalty of up to 2.5% where applicable. No other charges are levied.
Can I get a short-tenure loan and if so, how small can the term be?
No borrower wants to bear the burden of a debt for long. If your business needs a small sum that can be repaid in less than 12 months, why stretch your EMIs for years? Do not sign up for long-term loans if short-tenured credit products that fulfil your business requirements are available.
FinTech companies do offer short-term loans and merchant cash advance to businesses. Choose them whenever possible.
Ask these six questions, compare the answers that you get from alternative sources and then make your decision to get the best loan for your venture.