How to fund a small business in India

Availing a loan for your business can often be stressful and time consuming. At https://msmemitra.com we believe in empowering potential borrowers by sharing information through our websites https://msmemitra.com and http://loanjugaad.com which we feel will help them make an informed decision about the funding options available to them.

With its population in excess of 1.3 Billion and increasing, India has been the centre of world’s attention for its potential. As it happens, India is also the 6th largest and fastest growing trillion dollar economy in the world and is on its way to becoming a hub for innovation and disruptions with a number of untapped segments ready for aggressive growth.

SMALL BUSINESSES (MSMEs) — THE BACKBONE OF INDIAN ECONOMY
95% of the total Industrial units in India are classified as Micro, Small and Medium Enterprises (MSMEs or Micro and SMEs). There are over 42.50 Million registered and unregistered MSME businesses in India which employ over 80 Million people (6.15% of the total population and 40% of the total workforce).

Almost 50% of India’s total manufacturing output and 40% of the total exports come from MSMEs. 31.70% of the MSMEs manufacture close to 6,000 different products and 68.30% are engaged in services.

Knowing how critical MSMEs are to the economy, it can be deduced that the government and the banking sector focus heavily on MSMEs. A large number of SME Scheme and bank loan products have been devised to benefit the MSMEs and help them grow at a fast pace.

FUNDING OPTIONS AVAILABLE FOR MSMEs IN INDIA:

A lot of MSMEs in India, especially in the manufacturing sector, are working capital intensive and require credit facilities which can cover the shortage of funds during the working capital cycle.
Traditionally, Banks provide Cash Credit facility against the primary security of Stocks and Receivables (70% of the value of stock + receivables of up to 90 days), secured further by mortgage of property, for working capital. Under this loan, the businesses have to submit the statement of stocks and receivables on a monthly basis. The credit facility is reviewed and renewed annually and involves audit of stocks and book debts by an external auditor on regular intervals (which adds to the cost of funding).

Although there are a number of schemes like MUDRA and CGTMSE under which businesses can avail working capital loans without a collateral security, because of the growing NPAs at Banks and more stringent parameters for assessment, very few businesses are able to avail loans under these schemes.

As an alternate option, a few Private Sector and Co-operative Banks provide working capital funding by an Overdraft facility against property (up to 70% of the value of the property). In this case, there are no extra costs of external audits and no requirement for submission of statements of stocks.

Existing and new businesses can take an SME Loan for purchase of machinery or equipment. Traditionally, Banks fund only 75% of the total cost and require a collateral security by way of mortgage.

Although there are a number of schemes like MUDRA and CGTMSE under which businesses can avail working capital loans without a collateral security, because of the growing NPAs at Banks and more stringent parameters for sanction, very few businesses are able to avail loans under these schemes.

Alternatively, there are private sector Banks and NBFCs which provide machinery and equipment loans without any collateral security. As the loan is not secured by a collateral, the rate of interest is generally higher than an SME Loan with a collateral security.
All types of SME Loans are for capital expenditure, and not for any operational expenditures.
Businesses often find themselves in need of short-term funding for operational expenses or for marketing or any other expense which does not result in direct creation of a tangible or financial asset which can be hypothecated to Banks.

For existing businesses with a turnover of at least Rs. 20 Lakh, minimum 3 years ITR and Balance Sheet, and profitable in at least last 2 financial years, Banks and NBFCs offer Unsecured Business Loans.
FEATURES OF AN UNSECURED BUSINESS LOAN
Loan amount up to Rs. 50 Lakh from a single Bank or NBFC
Hassle-free processing within 10 days
Minimum documentation & Quick Disbursement
No security or guarantees required
Interest rate between 12% & 21% on reducing basis, based on business profile
6% to 11% effective rate of interest over the tenure
Loan to be repaid on EMI in 12 to 60 months
0.30% of the loan amount as cashback from us after disbursal

ELIGIBILITY FOR THE LOAN
Proprietorship and Partnership firms, and Pvt Ltd companies
Line of business — Manufacturing or Service
Business owners should be aged between 21 and 60 years
Business existing for at least 3 years
Minimum turnover of at least Rs. 20 Lakh in previous year
Business should be profit making in at least last 2 years with minimum 3 years ITR & Audit Report
No defaults in repayment track record of business
No defaults in repayment track record of business owner

While the interest rate for unsecured business loan may seem higher as compared to the interest rates for SME Loan, the effective cost of funding turns out cheaper, as can be seen from this infographic.

4. Other means of funding businesses:
i. Loan Against Property — Start-ups and SMEs can avail a loan against property at affordable rate of interest and for repayment period between 3 and 15 years. Even if the business is new, the loan can be availed based on the financial strength of the promoters. The rate of interest for a loan against property varies between 9.50% and 11.50% and banks give up to 70% of the value of the property as loan.

ii. Home Loan top up — If the promoters have an existing home loan, they can avail top up of an applicable amount over and above the home loan amount for any purpose. The rate of interest is typically 0.50%-1% over and above the rate of interest of the home loan.

iii. Equity based funding — The funding is given not as a loan but by taking shares in the company. Equity based funding is considered ideal for start-ups post revenue stage, with a scalable business model which can give a very high return on the investment by sale, acquisition, merger or public listing within 5–7 years of investment. Certain SMEs which have crossed the turnover milestone of Rs. 50 Crores per annum, have been growing faster than industry average and have a clear path for growth of business into a large enterprise ripe for IPO in 5–7 years can also consider this type of funding.

About us:

MSMEmitra.com Consultancy Services LLP (MSMEmitra.com) is a Navi Mumbai based start-up working primarily in the SME and (Secured) Retail Lending segments.
Our team is backed by the promoters’ and group concerns’ experience of over 40 years in the field of banking, credit reporting, due diligence, B2B recovery and financial consultancy in the MSME segment.

Through our two websites, we aim to add value by disseminating information which is useful for the growth of businesses and also helpful for businesses and retail borrowers in making an informed decision about the most suitable funding options available for them.

Since our inception in August 2017, we have helped a number of businesses and individuals in raising funds through banks and NBFCs.

What we offer:
Image Source — https://msmemitra.com
BUSINESS ADVISORY SERVICES
Business Intelligence reporting from a financial point of view, to help business owners in efficient financial and cash-flow management.

MSMEmitra.com prepares thoroughly researched project report for bank loan within 7 days, which helps speed up the loan processing & faster decision making by the Financial Institution.

FINANCIAL MANAGEMENT
MSMEmitra.com helps businesses in identifying problems in financial management, and provides bespoke consultancy to come up with innovative solutions for streamlining financial management and the process of fund raising.

DEAL STRUCTURING
Structuring private equity deals where investors and business owners have mutually agreed terms of investment, through our associates who have unmatched competence and experience in their domain.

MSMEmitra.com helps Start-ups, Micro and SMEs to identify and avail the benefits of the industry specific applicable schemes and subsidies promoted by the Union Government of India, through an automated process on the website.

We offer Home Loans and Mortgage Loans, through segment leading Banks and NBFCs. These loans are processed hassle-free and at the best interest rates. Upon disbursement of loans processed through our partner banks, we offer cashback (0.10–0.30% of the loan amount).

We offer unsecured business loans through segment leading Banks and NBFCs, processed hassle-free at the lowest rate of interest and charges. Upon disbursement of loans processed through our partner banks, we offer cashback (1.00% of the loan amount)

We process SME Credit Limits and machinery loans through public sector, private sector and co-operative Banks, and NBFCs. Upon disbursement of loans processed through our partner banks, we offer cashback (1.00% of the loan amount)

MSMEMitra.com helps businesses:
i. Assess the exact funding requirement
ii. Identify the most suitable funding option available (Debt or Private Equity or a combination of both)
iii. Identify and connect business owners with the most preferred funding partner (investor or lender) based on the profile and requirements of the business
iv. Prepare teaser deck, pitch deck, investor memorandum, credit assessment reports, business plans, due diligence reports, unqualified valuation reports, financial models & key financial metrics
v. By anchoring the entire deal as advisors-cum-consultants, to ensure smooth processing, negotiations, documentation and compliance as per the funding terms
vi. And finally, in raising funds through our network of Banks, NBFCs, Private Equity Investors, Angels and Venture Capital firms

Visit us on https://msmemitra.com for your funding requirements.

Comments

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