There are presently over 6 crore MSMEs in India, with over 4 lakh new ones registered in 2019-20. The MSME segment is the largest employment generator in India, with over 11 crore employees, and contributes about 30% to India’s GDP. Therefore, the growth of MSMEs has been a policy priority, with many financial interventions ensuring the flow of credit to the segment.
While many government schemes and grants for entrepreneurs who want to set up SMEs can be hard to qualify, especially in rural areas. The primary source of credit within reasonable terms is MSME Loans. Among all other borrowing options, MSME business loans are the most cost-effective.
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Why are MSME Loans More Cost-Effective than Other Lending Options?
The most popular lending option in India has always been informal credit. Small business owners, farmers, artisans, etc., still borrow money from friends, relatives, tradespeople and intermediaries, etc., for meeting their cash flow requirements. A report by Omidyar Network and BCG estimates that 40% of MSME lending was informal in 2018 while 25% was lent invisibly through proprietor’s channels.
The business loan interest rates of informal business credit can be as high as 30-40% or more if the borrower is not well-informed or has an emergency. In contrast, formal credit can be provided at interest rates as low as 7.6% in public sector banks and go up to 15% in NBFCs. The borrower’s application is relevant in deciding the case-by-case interest rate.
Why institutional credit is cheaper than other lending channels:
- Lenders like PSBs and NBFCs are often backed by governments and have very large provisioning standards for lending activities.
- They can easily achieve economies of scale and thus lend to more borrowers and generate profits from interest repayments.
- The lending is more due to social objectives than pure profit-seeking, unlike informal lenders.
- There are uniform rules and procedures for every customer, and these are well-known, reducing the scope for fraud.
How Can MSME Loans be More Cost-Effective?
The micro, small, and medium businesses face a crunch of working capital and often need loans to tide over till their invoices are encashed. There are generally two types of loans for SMEs, working capital loans and term loans.
Business loans for small and medium scale enterprises from institutional lenders like FlexiLoans can be sanctioned for loan amounts from INR 50,000-10 crore and at affordable interest rates with a facility for flexible equated monthly instalments. The repayment tenure can be from 12 months to 5 years.
In business, time is money, and since the loans are sanctioned quickly, the business owner can get cash for working capital requirements and operations very quickly.
A major cost of getting an SME loan is the provision of collateral. Though collateral is usually an illiquid asset, loans from companies like FlexiLoans are unsecured or collateral-free, leaving business people free to leverage their assets in other ways.
The advantage of approaching an institutional lender like FlexiLoans is the variety of lending solutions available to medium, micro and small firms. From large term loans for business expansion and carrying out a large, bulk order, there are many more innovative solutions available than any informal lender to smaller loans.
- Line of Credit: This is a short term loan to tide over unforeseen liquidity requirements. When a business sees seasonal fluctuations or emergency funds to manage stocks, amounts up to 1 crore may be needed for daily working requirements. The interest rates are very affordable and based on the sales data of the firm.
- Loan Against POS: Many small businesses are tech-savvy and use point-of-sale devices for digital payments via cards or mobile wallets. They can use such data to get a working capital loan with lesser eligibility conditions.
- Vendor Financing: Small and medium businesses can use this against invoices with vendors and pay them after the final sale. It helps businesses with short-term balance settlements.
Why Are MSME Loans Needed?
The greatest need for MSMEs in 2021 is to scale up their presence across the web along with the traditional offline destinations. It costs quite a bit of money. While with good marketing, they can gain access to a bigger customer base and get higher revenues, it requires quite a bit of working capital.
Some MSMEs have been cutting costs by using social media tools to sell their products. It leaves them with operational expenses, wages, logistics and supply chain costs, etc. Many require funds as they are growing.
One way many small and medium businesses save costs is by forming self-help groups to work together in marketing and making their products. Registered self-help groups have a much easier time gaining credit. They also form small cooperatives to become trustworthy and accountable borrowers.
Conclusion
There are other MSME loan options from the government, where eligible SMBs can get credit from the Ministry of Micro, Small and Medium Enterprises and the MUDRA agency. These are undoubtedly good options but can be challenging to avail without a lot of paperwork. One can also approach organizations like FlexiLoans for additional, hassle-free assistance if they have already availed a government loan.
