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Understanding MSME loans: what they are and why they are important

by Marketing Marine
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MSME loans

Many economic growth models are being developed in India which prove that the future lies in the development of the MSMEs sector. ‘The Backbone for Indian Economy’, commonly known as MSMEs, has been instrumental in propelling India’s economic progress. MSME as it fully expands to Micro, Small and Medium Enterprises, are those businesses whose annual turnover ranges anywhere between Rs. 1 crore investment to Rs. 250 crores turnover. The majority of these businesses fall into both the manufacturing and service sectors. This growth engine of the Indian economy is expected to continue over the forthcoming years, making MSMEs an integral contributor to the country’s GDP.

Many entrepreneurs aspire to start their own businesses. However, a handful of them struggle due to a lack of financial support. MSME growth is hampered by a lack of easy finance and modern technology, as well as other constraints and a lack of basic infrastructure. To address these issues, the government and financial institutions have been providing affordable MSME Loans more accessible to small businesses in meeting their objectives.

Finance is the fuel to run the business, which is necessary for effective running of the business. MSMEs have always struggled to find funding on their own to run their businesses and cover other costs such as salaries, rent, and bills. A significant majority of MSMEs rely on cash/capital for these expenses, and the traditional working style became a barrier during the pandemic along with their poor knowledge of managing and sustaining a steady cash flow. As a result, the demand for MSMEs loans grew higher.

What is an MSME loan?

MSME loans are credit funding specifically designed for MSMEs, individuals, startups, self-employed professionals, and other business entities for business expansion and day-to-day operations. These loans come with a number of advantages and features, including:

  • One important advantage of obtaining an MSME loan for new business is that the loan amount is provided without the need to pledge any asset as collateral.
  • MSME loans can meet a company’s short-term capital needs without requiring the borrower to make a long-term financial commitment.
  • Lenders provide low-interest business loans to MSMEs and thus reduce the borrower’s financial burden.
  • MSME Loans are called the best small business loans since they offer flexible repayment methods. Apart from flexible repayment tenure, these loans can be secured or unsecured loans but the decision is based on the borrower’s capacity to repay the loan.
  • Getting an MSME loan is simple and hassle-free. You benefit from instant disbursement and quick access to the funding you require because there is less paperwork involved.

Several entrepreneurs, financial institutions, and government organizations have expressed concern about financing for MSMEs. They confront numerous challenges in obtaining financing at various stages of their life cycle. According to a study conducted by an IIM faculty member, the main challenges faced throughout the various stages, such as the start-up stage, survival stage, growth stage, and sustenance stage, were the under-utilization of formal sources, inadequacy of collateral assets, and entrepreneurs’ lack of financial awareness.

MSME loan

High service fees for loan requests, as well as the complexity of documentation, were perceived as other challenges by many business owners. Some of them may be unable to provide collateral for a loan if they are just getting started, and they may be unfamiliar with available schemes, which could prevent them from deciding on the best option for funding.

Apart from the risk of becoming technologically obsolete due to evolving technology, MSMEs now must tackle intellectual property protection and skilled labour shortage. They also face high credit costs and are frequently unable to identify their key competitive strengths in order to maintain product standards and quality. As a small business owner, you may encounter financial difficulties due to fluctuating market conditions. Thanks to MSME loans, businesses can now grow to meet all these demands without facing high credit costs.

You can effortlessly avail of MSME loans online in just a few clicks if you have a good credit score and the right documentation. With such quick funding, new businesses can look into investing in expanding their inventory, paying off employee salaries, or even reaching new horizons with their business. Many financial institutions, such as Karnataka Bank, aim to provide MSME loans so that businesses can operate with maximum financial flexibility.

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