Practical Guide On How To Apply For and Get a SME Loan
SME stands for Small and Medium Enterprise. In India, it is estimated that there are more than 50 million SMEs operational throughout the country. In common terms, a SME means any small business with a turnover starting from few lakhs to few hundred crores.
A small grocery shop (kiranawala) is a SME business as well as a small pharma manufacturing company with a turnover of Rs. 150 crore. Sales turnover is the main criteria to define a SME.
However, sales turnover is not the only criteria for recognition as a SME. Other factors like number of employees, factory or unit size, location, etc also determine whether to recognize as a SME or not.
Even startups registered nowadays prefer to be known as a SME to identify themselves and obtain benefits associated with SMEs. Even in India, we also use the term MSME, which stands for micro, small and medium enterprises.
There is also a MSME ministry that looks after the well-being and growth of MSMEs and SMEs by helping them get access to funding, technology, linkages, networks and other business opportunities.
The main point worth noting here is that SMEs play the most vital role in job creation and income generation for crores of Indians. Without the 5 crore small businesses, there would be a huge shortage of jobs in the country and unemployment.
Even though SMEs play such a vital role for the Indian economy, they face lots of challenges to survive and succeed, and thus many small businesses and startups shut down within 1 year of starting up.
The biggest challenge that a SME business faces is lack of capital of funds essential for business set-up, hiring manpower, product or service testing & launch, expansion, growth and other critical business demands.
WHAT CAN A SME DO TO GET ACCESS TO FUNDING?
Let me start by sharing that it is not at all easy for a new startup business to get access to funding. This is the reality in India right now, even after 2 years of the Government announcing the Mudra Yojana for startup funding support and launched the SIDBI Fund of Funds with Rs.10000 crores initial corpus.
Startups that have tried and failed to get access to government funds know this reality and have accepted this truth. Majority of Banks and NBFCs do not support startups. It is not possible for a startup to even get access to debt capital, also commonly known as SME Loan or Business Loan, from a bank or NBFC before they complete 3 years of business existence.
Banks call this “vintage” proof. So, what can then SME startups do to access funding and pray that they are lucky; yes luck plays an important role in business too!!
If you are looking for a SME Loan portal to help you obtain SME Loan, contact us here.
Below, we outline some steps that SMEs (referring here to new startups and those more than 3 years old) can take to apply for and obtain critical SME Loans:
- Keep Expenses in Check – This point might sound like ‘gyan’ (advice) because it is ‘gyan’ or good advice. The easiest way to have funds is to save the funds you have. Most startups and SMEs initially end up taking lots of licenses and registrations and end up wasting their hard earned savings capital. The first step is to cut down our business expenses on a daily basis so that your finances are managed efficiently and you can build the patience required for raising SME loan from either goverment funds, banks, or NBFC’s.
- Get Books Ready – The next most important step is to have your financial and accounting system in order. This means that your accounting books must be in order for your business to portray financial readiness and be prepared to receive funds. Absolutely no bank or NBFC likes to fund a business with low level of accounting or financial preparedness. Funding agencies like banks and NBFCs have constantly pointed out that this is one of the weakest aspects of Indian businesses. Get your Accounting system ready. Period.
- CMA Data / Projections – Before applying for a SME Loan, you would need to engage the services of a professional Chartered Accountant (CA) to help you prepare the financial projections. It would be much preferred to also additionally prepare the projections in the right format required by banks. As stipulated by The Reserve Bank of India (RBI), the financial projections should be in CMA Data Format. CMA stands for Credit Monitoring Arrangement. CMA Data is essential for accessing debt capital from banks. In case, you need CMA data, then contact an expert CA.
- Startup India Registration – The Government of India has launched the Startup India Registration Program for startups to apply for their innovative ideas, products and ideas and get certified from DIPP Ministry (Department of Industrial Policy & Promotion, Ministry of Commerce and Industry). The portal link is www.startupindia.gov.in. Registering for the Startup India Program takes time and lots of efforts as not all startups get certified. But once you successfully get the Startup India Registration, it becomes easier to obtain bank funds under the Mudra Yojana or Standupindia program at very cheap rates of around 1% per month.
- Current Account – Open a current bank account and maintain the balance. Having a good bank balance is a good indicator for other banks to lend to your business. Manu banks like HDFC Bank may also offer you loans in your account even though your business is less than 3 years old.
- Approaching Banks – Approach banks cautiously only when you have the Investment Kit ready which comprises of Financial Projections, Business Plan Deck, Founder’s Profiles and all other supporting documents that portray strong picture of you and your business. You are the face of your business so also remember to be well dressed and well groomed. Avoid wearing that old jeans and t-shirt to the bank please!!
- Approaching NBFCs – NBFCs are different kind of financial institutions that many entrepreneurs don’t know much about. A NBFC is like a bank but not a bank; NBFC stands of Non-Banking Financial Company, approved and registered with the RBI. There are more than 25000 (yes, twenty five thousand) NBFCs in India. But people are not aware majority of NBFC except the big brand names like Indiabulls, DHFL, IIFL, Edelweiss, Aditya Birla, Hero Fincorp, TATA Capital, Mahindra Finance, L&T Finance, etc. Nowadays some NBFCs have also lending money to new businesses that are less than 1 year old. Keep in mind that while banks offer business loans starting from 14% to 19% interest rate range, NBFCs typically offer business loans from 16% to 70% per annum depending on the Director’s CIBIL score and past history. It is not easy to get access to funds from NBFC; however it is easier than banks.
- MUDRA Yojana & Standup India Scheme – The Mudra Yojana was supposed to be a game changer for the Indian startup ecosystem and provide access to funds to majority of startups via bank partners. Sadly, the MUDRA Yojana has just become a microfinance restructuring program (more on that later). Banks are highly reluctant to lend to startups under the Mudra Yojana. The Standup India Scheme is available to women entrepreneurs who own more than 51% in the registered business entity. This loan is given collateral free. You have to approach your local banks to avail these schemes as you will not get much success online. Click Here for : Company Registration in India
Conclusion
There are many more options available to entrepreneurs to get access to debt capital. You may follow one of the options suggested above if you can and if it works for you. Probably what still works best in India is access to bankers through your friends and relatives. Not everyone knows bankers personally, but if you do, then you can speak to them and approach them. We understand that raising debt capital is highly challenging for SMEs. We wish them best of luck in their entrepreneurial journey.
Disclaimer
The views expressed herein are the personal views and opinions of the author Mr. Avik Kedia, who is the founder & CEO of FinanceBazaar.com
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