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Business Loans: Collateral-free Financing for Business Growth

Published on 18 Apr, 2024
Author CredAble Team

What are MSME Business Loans?

Micro, Small, and Medium Enterprises (MSMEs) play a pivotal role in India by contributing 30% to the nation's GDP. For MSME entrepreneurs aspiring to elevate their businesses, accessing MSME loans is a strategic move. These loans cater to micro and small business owners, women entrepreneurs, and startups, serving diverse purposes like acquiring raw materials, expanding product lines and personnel, or renovating business spaces. With over 63 million MSMEs employing 111 million skilled and semi-skilled workers, this sector is a cornerstone of India's economic development.

However, financial constraints persist due to a substantial credit gap of US$530 Billion. Non-Banking Financial Companies (NBFCs) emerge as crucial players, bridging this gap efficiently. NBFCs leverage technology, operational cost advantages, and extensive reach to offer faster access to capital compared to traditional banks.

In the last financial year, NBFCs have experienced a 10% growth in loan portfolios, outpacing the 5% growth observed in bank loans. With their digital approach, MSME business loans stand out for their agility and flexibility, fostering the growth of small businesses nationwide.

MSME Loan Schemes

Recently, there has been a significant mark-up in the MSME enterprises and start-ups in India. This boost has been supported by the MSME Act, 2006 and the Start-Up India Initiative. The Government of India has recognised the large credit gap faced by MSMEs in the country and has launched several schemes to aid in fulfilling this gap.

Some of the popular schemes launched by the government to provide MSME business loans include the

  1. Pradhan Mantri Mudra Yojana (PMMY)
  2. Prime Minister’s Employment Generation Programme (PMEGP)
  3. Credit Guarantee Trust Fund for MSMEs (CGT MSE)
  4. Credit Linked Capital Subsidy Scheme (CLCSS)
  5. Equity Infusion for MSMEs through Funds of Funds
  6. Credit Guarantee Scheme for Subordinate Debt (CGSSD)
  7. SIDBI Make in India Loan for Enterprises (SMILE).

Features of MSME Loans

Features of MSME business loans include:

1. Unsecured Collateral-free MSME Loans

With a flexible and digital application process, NBFCs are providing collateral-free MSME loans with minimal documentation. All registered MSMEs from diversified sectors now have the capability to apply for unsecured MSME business loans without the burden of having to mortgage any property collateral.

2. Easy Application Process and Fast Digital Disbursement

MSME owners can apply for loans easily since the loan application process has been digitised with minimal documentation required. Since the documentation and verification process have both been digitised, the disbursement time has been reduced significantly, and if the customer is eligible for the MSME loan, receives the same digitally within 24 hours.

3. Flexible Ticket Sizes

Several NBFCs provide flexible ticket sizes for MSME business loans based on the required of the MSME and prove beneficial for those which require immediate funding.

4. Flexible EMI Payment Options

NBFCs provide flexible EMI options to its customers giving their borrowers several options to repay the loan amount, including Digital Wallets.

Collateral-free Loans for MSME Finance

MSMEs utilise business loans to address operational financial requirements and fuel business expansion. Particularly for new enterprises, MSME business loans are often unsecured, eliminating the need for borrowers to provide collateral or security to the bank. Online lending platforms specializing in SMEs play a crucial role in facilitating accessible funding for businesses.

Unsecured working capital loans for SMEs come with favorable interest rates and can be repaid through Equated Monthly Installments (EMIs) over time. Typically, these collateral-free loans have a short-term nature with a 12-month repayment period, though the duration may extend up to five years based on the business's needs.

The MSME sector stands as a key contributor to India's industrial landscape, responsible for 45% of industrial production and contributing 40% to the country's exports. Given its significance, the MSME industry exhibits a heightened demand for corporate funding. However, the lack of timely capital emerges as a significant obstacle to MSME growth in India. NBFCs are gaining prominence as an increasingly viable alternative to traditional banks, providing a more accessible avenue for MSMEs to secure the necessary financial support for their expansion endeavors.

Ways to Use an MSME Loan Without Collateral

MSME business loans without collateral are advantageous in multiple ways:

1. Capital Expenditure on Infrastructure

Entrepreneurs of small businesses have the option to utilise unsecured MSME loans to cover the expenses associated with acquiring new equipment. Since the procurement of machinery and equipment entails a significant financial investment, an MSME loan, with a limit of up to INR 1 crore, provides a viable means to expand the business without depleting available cash reserves.

2. Effective Inventory Management

Effective management of inventory is vital for small businesses as it directly impacts revenue, determined by sales volume. A noteworthy 31% of businesses seeking a small business loan allocate the funds specifically for inventory procurement. Small business proprietors commonly safeguard their inventory supply chain by leveraging their MSME loan resources. With an MSME inventory loan, entrepreneurs can adeptly navigate seasonal fluctuations, replenish existing stock, or acquire new product samples for resale, enhancing their flexibility in responding to market demands.

3. Efficient Working Capital Management

Handling weekly and monthly operational expenses falls within the realm of working capital management. This practice enables a business to operate autonomously, irrespective of its interactions with customers and suppliers. To effectively navigate cash flow and working capital, small or medium-sized enterprises may find it necessary to seek external financial support for their business operations.

4. Undertaking Marketing Promotional Campaigns

Promoting the company through marketing is instrumental in broadening its outreach. A well-crafted marketing strategy for small business owners serves a dual purpose: fostering renewed trust and loyalty among existing clients and attracting new customers. The subsequent step involves targeting potential clients in both current and new locations. However, undertaking marketing initiatives can be a financially demanding endeavor, requiring funds for an extensive online and offline promotional campaign. Entrepreneurs can kickstart a comprehensive marketing drive by tapping into an MSME/SME credit fund.

5. Easing Consolidation of Debt

The enticing feature of short-term MSME business loans lies in the ability to amalgamate smaller payments into a single Equated Monthly Installment (EMI). This not only alleviates the financial burden on a company's monthly budget but also facilitates the synchronization of debt repayment and invoicing dates. Moreover, through the consolidation of business debt, an MSME business owner might have the opportunity to diminish the overall payment for multiple loans by extending the repayment period up to one year.

What are Advantages and Benefits of MSME Business Loans

Collateral-free loans are a preferred financial solution for MSMEs, offering crucial support for their business operations.

The advantages of MSME loans include:

1. Meeting Fund Requirements:

Many MSMEs encounter challenges in financing various business needs such as asset acquisition, employee recruitment, and administrative expenses. Opting for external financing, like MSME loans, proves beneficial, preserving the business's own funds and safeguarding long-term success.

2. No Collateral Requirement:

The dynamic nature of the business environment often exposes small business owners to financial constraints. Unlike traditional loans that demand collateral, MSME business loans are collateral-free. This eliminates the need for businesses to pledge assets, allowing them to retain ownership while securing necessary funds.

3. Flexible Commitment Durations:

MSME loans offer flexibility in commitment durations, catering to both short-term and long-term financial needs. Small business owners can choose short-term loans for working capital requirements, managing cash flow positively without creating long-term financial obligations.

In conclusion, MSME business loans stand as a pivotal catalyst for the growth and sustenance of micro, small, and medium enterprises in India. As integral contributors to the nation's GDP, MSMEs play a crucial role in economic development.

Despite facing a substantial credit gap, innovative financial solutions, particularly collateral-free MSME loans offered by NBFCs, have emerged to bridge this divide. With streamlined application processes, fast digital disbursement, and flexible terms, MSME business loans empower entrepreneurs to meet diverse business needs.

These loans serve as a lifeline, enabling strategic capital expenditure on infrastructure, efficient inventory management, and effective working capital management. Additionally, they facilitate marketing initiatives and debt consolidation, offering businesses the financial freedom to expand, innovate, and thrive in the dynamic economic landscape.

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