Requisites To Include To Apply For MSME Loan
When starting a new business every entrepreneur requires capital for the business, whether to buy raw materials or to stock up on inventory or for purchasing the equipment or as a down-payment for the business/shop premises or to apply for the various registrations and licences required for the business. Capital is a necessity to make a smooth start for a new business or to help an existing business grow and expand. But from where do entrepreneurs procure the required capital? It could either be from the savings the entrepreneur must have accumulated over the years or the best and recommended option is to obtain it via a loan.
An MSME loan is a loan meant for micro, small and medium enterprises (MSMEs) that is offered by banks and non-banking financial companies (NBFCs). A loan from banks or from NBFCs is an important source of funding for entrepreneurs to start or expand their businesses. This MSME loan can either be in the form of cash credit for working capital or in the form of term loans to make purchases for fixed assets.
In order to apply for MSME loans, entrepreneurs need to provide certain information in a particular format as required by the funding institutions and the banks which are usually listed in a consolidated checklist.
However, let’s start from the beginning and first understand the modified classification for MSMEs. The previous classification for Micro, Small and Medium Enterprises (MSMEs) was based on investment alone but now considers annual turnover too along with investment. Along with this change, the Government of India has also increased the investment limit that was set as a threshold to classify MSMEs, thus allowing more enterprises and firms to be classified as MSMEs and to avail the benefits of the schemes for MSMEs, such as apply for MSME loans along with several other benefits.
The new classification is as follows-
- Micro-Enterprise– A business that has an investment of less than Rs. 1 crore and a turnover that does not exceed Rs. 5 crores is termed as a Micro Enterprise.
- Small-Enterprise– When the investment of a business does not exceed Rs. 10 crores and the annual turnover does not exceed Rs. 50 crore, the business is termed as a Small Enterprise
- Medium-Enterprise– When the investment of a business does not exceed Rs. 20 crore and the turnover does not exceed Rs. 100 crore, the business is termed as a Medium Enterprise.
Requisites To Apply For MSME Loan
Micro, Small and Medium Enterprises can apply for MSME loans to start a new enterprise or to expand their business. The rate of interest when businesses apply for MSME loans starts at 7.65% per annum. The amount sanctioned for MSMEs can range from as low as Rs.50,000 to as high as a few crores. Depending on the loan amount sanctioned, MSMEs can repay the loan within a tenure of up to 15 years.
- Requisites For Loan Application
In order to apply for MSME loans, entrepreneurs need to submit a funding proposal. The funding proposal must contain requisite details which are outlined below.
- Cover Letter and Sheet
The cover sheet is the front page of the loan proposal stating the name of the business applying for the loan along with their address and contact details.
The cover letter is addressed to the banker or the funder requesting them to consider the proposal submitted to apply for MSME loan.
- Business Plan
This is a vital document that covers the business description, market analysis, description of management, profit and loss statements, cash flow and balance sheet, financial projections, the funds required and purpose, marketing plan and strategy. A business plan is a must while applying for an MSME loan for the business and the essentials of a business plan can help prepare a thorough business plan while applying for an MSME loan.
- Management Team
The loan proposal must also include a description of the Team that will help the business owner run and operate the business. The details must include a list of the names of individual team members, their responsibilities and a brief description as to why they are the right choice for the business.
- Loan Amount
This is the most important information to be included in the loan application proposal in order to apply for an MSME online loan or in-person. Along with the amount it should also be mentioned how the amount will be used. If the amount is going to be used to purchase machinery or equipment then the market price of these along with installation and maintenance costs must be mentioned.
- Financial History
In order to apply for MSME loan, entrepreneurs need to include the financial history of the business. Bankers or funders ask for the profit and loss statements and balance sheets of the business to get an idea of the financial history.
While including details about the financial history, entrepreneurs must also include the
- Business credit report
- Personal credit report
These credit reports can help lenders understand the financial position of the business, its credit history and helps them decide whether to sanction the MSME loan or not. In case of any inaccuracies in the credit reports, they must be mentioned beforehand else it will hamper the chances of securing the loan.
- Financial Projections
The next important information to include is the financial projections for the future of the business, and how the business will recover the loan amount. Three vital documents need to be submitted to support the financial projections, namely the balance sheet, projected income statement and cash flow statement. Funders can estimate whether the business will repay the loan or not from these documents.
Another important information to be furnished is regarding the collateral that will be listed as an available backup loan repayment resource. This could include stocks and bonds, cash reserves, equipment and inventory, home equity, and receivables. The market value of the collateral must also be mentioned.
- Market Information
This includes a description of the product or service that the business will offer along with the targeted market. The niche created by the business in the market also needs to be mentioned along with future plans to expand and reach out to a wider audience.
- Additional Documents
In order to apply for MSME loan, entrepreneurs need to submit documents such as
- Proof of Identity- PAN card, Aadhaar card, voter ID, passport
- Proof of Residence and Business Address- utility bills, rental agreement, ration card
- Proof of Income- balance sheet copies
- Tax Documents- income tax return, PAN card
Along with these, businesses can provide additional documents such as proof of securities, financial projection documents, project reports, etc.
These are the basic details to be included in the funding proposal to apply for MSME loan which entrepreneurs can prepare themselves or apply for a funding proposal creation service to create a thorough and detailed funding proposal for their business.
- Assessment For Funding Readiness
Along with the details and information required to apply for an MSME loan, entrepreneurs can also take a funding readiness assessment to find out if their business is eligible and ready to apply for MSME online loan or in-person loan, thereby increasing the chances of getting the loan approved. The assessment will help businesses think from the funder’s perspective and make their business funding ready.
These are the basic requisites for an MSME loan application which will help businesses be prepared while applying for an MSME loan and improve their chances of getting the loan sanctioned. Entrepreneurs can further take deAsra‘s assistance to prepare the funding proposal as well.