India’s Micro, Small and Medium Enterprises have been formidable in maintaining a steady annual growth rate of 11-13% over the last decade. The sector has exhibited strong resilience against the face of global economic uncertainties over the past couple of years.
Those who know what is MSME will also know that these enterprises have significantly contributed to the nation’s economy by generating employment, bringing rapid industrialization in rural areas and contributing massively to the export of various goods.
According to a recent estimate, the MSME sector contributes around 39% to the country’s GDP and accounts for 45 and 50% towards export and manufacturing outputs, respectively.
Now, that you have learned all about MSMEs and how its growth is crucial for the Indian economy – take a look at how to finance the nation’s MSMEs.
A lenders perspective of MSME funding
Finance plays a pivotal role in any business segments, and this holds supreme importance in case of MSMEs. Small enterprises need funds to purchase equipment, restock the depleted inventory, expand business operations and boost the working capital.
A lender must understand the specific needs of these businesses and devise the MSME loan schemes in such a way that borrowers are capable of repaying them. Micro, Small and Medium Enterprises do not possess ample financing to develop verticals within their organization. Thus, they end up hiring employees on a part-time basis.
However, while this suffices their immediate necessities, when it comes to borrowing from financial institutions, investors fall short in creating the required documentation. This can be perhaps being overcome if a lender provides easy financing with minimal documentation.
MSMEs must be allowed to have full control over Business
While opting for MSME loan schemes from angel investors and venture capitalists, funds come at the cost of reduced ownership in the business. However, Non-Banking Financial Companies do not interfere with the liquidation of control. This control ‘aspect’ is specifically crucial for small business owners who have limited assets at their disposal.
NBFCs acknowledge this requirement and provide advances up to Rs. 30 Lakh with zero-collateral. Thus, it avoids pledging assets which are crucial to business operations of MSMEs.
Lenders must offer a lower interest rate
When it comes to funding MSMEs, a lower MSME loan interest rate is a vital factor. Lower interest rates ensure that MSME owners need not have to pay a substantial amount every month on repayment. The reduced financial burden with a lower interest rate can be put to better use in boosting their businesses further.
Acknowledging this requirement, most MSME loan schemes from leading NBFCs have a line of credit facility. This facility allows businesspeople to withdraw funds and repay them as per their requirements. Here, the interest is calculated only on the withdrawn sum, thus preventing unnecessary debt servicing.
Now, that you know what is MSME loan all about, it is clearly an ideal choice for small and medium business owners. These are tailor-made financial arrangements packed with all the appropriate benefits.
MSME loans are versatile and help businesses to increase their working capital, purchase or upgrade plant & machinery, lease or buy a larger place of operation, etc.