By Rahul Shetty, Brand Consultant
Starting a small business is no small decision. And once you have started up, scaling up the business can be confusing, worrying and tedious; all at the same time. If you’re thinking about taking the plunge and scaling up your business, there are some key steps you need to take first.
But before that, let’s understand what qualifies as a Micro, Small and Medium Enterprise (MSME). The definition of MSME was altered and was announced by the Government of India on 13th May 2020.
Given below is the new definition of MSME:
⚫ The criteria for MSME classification have been changed from Investment to Investment and Annual Turnover.
⚫ The Government of India also increased the investment limit for the classification of MSME units. This means that more firms and enterprises can now avail MSME schemes.
⚫ Criteria for the classification of MSMEs is now uniform for Manufacturing and Services Enterprises which is given below in the table below:
|Investment||>₹1 crore||>₹10 crore||>₹20 crore|
|Turnover||>₹5 crore||>₹50 crore||>₹100 crore|
Micro, Small, and Medium Enterprises can avail MSME loans for the expansion of businesses or for setting up new enterprises. The interest rates on MSME loans start at 7.65% per annum. The loan amount sanctioned ranges from as low as ₹50,000 and can go up to a few crores. On the basis of the sanctioned loan amount, the loan repayment tenure can go up to 15 years.
Things to keep in mind whilst going through with the MSME loan process.
⚫ Check your credit score before applying for an MSME or SME loan. Most lenders rely on credit rating for preliminary loan approvals.
⚫ Get your documentation in order before starting the loan application process.
⚫ Prepare a business plan that specifies how you intend to use the loan funds and how much time it might take to generate positive returns from the investment. Every lender may not ask for it but it is good to have a business plan ready to assuage a lender’s concerns.
⚫ Assess your MSME loan requirements before applying. Try not to overestimate or underestimate your loan requirements as in both cases you will end up wasting time and money.
⚫ Do not apply with multiple lenders as it will reduce your credit score by several points. It also shows financial desperation on your part, which might put off potential lenders.
⚫ Do not delay your repayments for existing debts even if you are taking the MSME loan for debt consolidation. It has a negative impact on your credit score and financial goodwill.
⚫ Do not go for lenders who charge you an upfront fee. There are many fraudulent lenders in the online space who may ask for huge fees for approving your MSME loan application. A genuine lender will never ask you for an upfront fee and only charges a percentage upon disbursal of the loan.
The Bridgegap Verdict
Now that you have got a loan, here are 5 ways you can utilise the funds of an MSME loan.
1. Inventory Management
Inventory management is an essential part of a small business because profits are driven by sales volume. As many as 31% of the businesses applying for a small business loan use the funds to purchase inventory. Leverage your MSME loan funds to secure your inventory supply chain. Manage seasonal troughs, rebuild existing inventory or purchase new product samples for sale with an inventory loan for MSMEs.
2. Purchasing Plant & Machinery
A small business owner can use unsecured MSME loans to fund the purchase of new equipment. Since, investment in plant and machinery requires heavy funding, an MSME loan up to ₹ 1 Crore can be helpful in expanding your operations without straining the company capital fund.
3. Working Capital Management
The primary purpose of working capital management is to enable your company to maintain sufficient cash flow to meet its short-term operating costs and short-term debt obligations. Working capital management helps maintain the smooth operation of the net operating cycle, also known as the cash conversion cycle (CCC)—the minimum amount of time required to convert net current assets and liabilities into cash.
4. Consolidate your business debt
The most beneficial aspect of short-term MSME loans is that they let you consolidate smaller debts and make them a single EMI. This helps you reduce the strain on your monthly budget, it also enables you to align your debt repayment with your invoicing schedule. By consolidating business debt, you may be able to reduce the amount that you are currently paying for sundry debts as now you have the option to expand the repayment schedule up to 12 months.
5. Invest in Marketing
Marketing helps in growing your business by expanding its outreach. There are mainly two actionable items that can be accomplished with an effective marketing strategy.
– Brand Awareness. By making your target audience aware of your product, you are working on acquiring new customers in existing or new markets. This directly will enable you to boost your topline growth.
– Customer Retention. By communicating with your existing customers, you are reinforcing their trust and loyalty to your brand.
And as they say, what’s good (and effective) doesn’t come cheap, and a comprehensive online and offline marketing campaign demands a considerable amount of investment. An MSME loan can empower you to confidently run comprehensive campaigns to make your brand heard.