How To Get More Results out of Your SME Loan?

How to get the most out of your SME loan?

To get the most benefit out of your MSME loan, ensure the following:

1. Comparison of costs:

Entering into a formal lending arrangement involves costs, such as processing fees, administrative costs, and interest costs. While looking for an SME loan, it is beneficial to compare costs charged by various lenders and select the best one. However, it is equally important to consider other parameters like terms, flexibility, and eligibility criteria, as the applicant's profile plays an important role in determining the charges.

2. Go for secured SME loan:

Secured loans usually have lower interest rates as compared to unsecured counterparts as banks pose a lower risk and have security in case of a default.

3. Maintain your CIBIL™ Score:

CIBIL™ score is an important criterion for banks. It shows your credit history and performance. In case you have a lower CIBIL™ score, then the chances of getting your loan sanctioned get reduced, even if you have applied for secured loans. In the case of unsecured loans, as banks do not have collateral security, CIBIL™ score becomes paramount to decide on the sanction or rejection thereof.

4. Have adequate documentation:

Each bank has its own documentation requirements. Furnishing all the required documents helps you get your loan at a lower interest rate.

5. Purpose:

Applicants prefer an SME loan primarily for two purposes:

• Working capital requirements:

  Working capital is the necessary fund to conduct your daily and routine operations. This includes salaries, wages, materials, rent, and more. The gap in the working capital cycle is usually filled by working capital loans to ensure the smooth conduct of business.

• Business expansion:

  Expanding your business requires a lot of capital. Whether it involves starting a new factory, godown, or office, or purchasing additional equipment or plant and machinery, or adding a new product line, a huge chunk of capital needs to be invested. Opting for affordable loans is better than burdening your business with sudden cash outflows.

6. Leverage your position:

Debt leverages the position of your business. While raising equity involves the distribution of profits, SME loans create a fixed charge against your profits in the form of interest payments. Such interest payments are also eligible for tax deductions. Thus, raising debt is cheaper than equity for any business.

7. Debt consolidation:

Your SME loan can be a great tool to consolidate your other debts. This also includes other unsecured lending arrangements that you might have entered to meet your business funding needs. Such unsecured loans from moneylenders or other unorganised sectors may involve high interest charges. Paying them off using an SME loan can reduce your interest cost.