Start-ups that have capitalized on a viable idea or found a way to cater to a niche market need soon find that the scope to grow depends on access to additional finance. Typically, they require small business loans for new product launches, entering into new product categories, expansion into newer locations, warehousing needs, hiring new staff/employees, and so on.
While there is a range of options available in small business loans, as an entrepreneur you should keep in mind the following factors that could affect your eligibility for SME finance:
1. Company type and size:
Companies or entities which are eligible for SME finance include sole proprietorship firms, partnership firms, private limited companies, public limited companies, manufacturing units, trading units, and service units. These should be registered under the Micro, Small and Medium Enterprises (MSME) Development Act, 2006 and should fall under any of these three categories:
• Micro enterprises (i.e., a manufacturing enterprise with a maximum of Rs. 25 lakh invested in plant and machinery, or a service sector enterprise which has a maximum of Rs. 10 lakh invested in equipment, or any other enterprise whose turnover is less than Rs. 5 crores).
• Small enterprises (i.e., a manufacturing enterprise with about Rs. 25 lakh to Rs. 500 lakh invested in plant and machinery, or a service sector enterprise which has about Rs.10 lakh to Rs 200 lakh invested in equipment, or any other enterprise whose turnover is between Rs 5 crore to Rs. 20 crores).
• Medium enterprises (i.e., a manufacturing enterprise with about Rs. 500 lakh to Rs. 1,000 lakh invested in plant and machinery, or a service sector enterprise which has an about Rs.200 lakh to Rs. 500 lakh invested in equipment, or any other enterprise whose turnover is between Rs. 20 crore and Rs. 200 crore).
Fintech companies usually decide on the quantum of SME finance on the basis of the SME’s monthly sales and their projected revenues, rather than the SME’s size. In contrast, SME lending by banks and traditional financial institution is size-based and takes the form of small business loans of a maximum amount of Rs. 50 lakh for micro-enterprises; between Rs. 50 lakh and Rs. 5 crores for small enterprises; and between Rs. 5 crore and Rs. 20 crores for medium enterprises
2. Operational history:
If you are seeking SME finance, your company needs to have a minimum operational history of at least one year. It should have an annual turnover of at least Rs. 25 lakh and should be based in India. This data helps the lenders assess the performance, monthly sales and the cash flows of your company to arrive at the amount of loan they can disburse. It also helps them fix the repayment schedule and tenure of small business loans.
However, the requirements for operational history and turnover vary depending on the type of loan and its tenure.
For example, the eligibility criteria for a term loan in some fintech companies include a 3-year operational history and an annual turnover of more than Rs. 1 crore. But, for online seller finance, the same lender may require a one-year operational history with quarterly sales of at least Rs. 75,000.
On the other hand, small business loans, such as term loans from a bank may require a minimum operational history of three years and a turnover of between Rs. 30 lakh and Rs. 3 crore.
3. Credit profile:
The Credit Information Bureau (India) Limited, also called CIBIL, is the first Credit Bureau or Credit Information Company in India. Member banks periodically submit information about their customers’ credit-related activities (loans and credit card activities) to CIBIL, which is used to create a credit report and assign a credit score to an individual/ company. The credit score depends on:
• The time and amount of loan/credit card repayment
• Negative marks due to foreclosure, payment defaults, written off/ settled loans
• The length of credit card history for analyzing the credit behavior
• Number of hard inquiries made by potential lenders or issuers of credit card
The CIBIL score can be recorded between 300 and 900. If you/your company has a CIBIL score of around 750, it is easier to procure SME finance. Fintech companies look for a 650+ CIBIL score for their term loans. SMEs should try and maintain a good credit score/history and should try to improve both, as their eligibility for future SME finance depends on these.
4. Business Plan:
A clear and comprehensive business plan helps to ease the SME lending process and allows the lenders to disburse the SME finance faster. It helps lenders decide the appropriate type and amount of small business loans they can offer you. Lack of a business plan may mean much slower disbursals or even rejection of your loan application. So, ensure that your business plan clearly indicates:
• Your business objectives and goals
• Plans to achieve stated goals
• The specific amount of funds required, the purpose (provide a detailed break-up), the timeframe in which they are required, and so on
• The current financial status of your company
• How and when you will be able to make repayments.
Since banks and traditional financial institutions usually undertake asset-based SME lending, small businesses find it difficult to procure funds, as they have little or no collateral to pledge. The good news is that with advances in technology in the field of finance, new-age lenders are able to assess a firm’s ability to repay loans and require no assets/collateral as a guarantee. Thus, you can avail of unsecured loans or SME finance as long as you have been making your payments on time on your credit cards, suppliers and so on. These fintech companies use advanced algorithms to uniquely underwrite businesses, check on applicants’ repayment abilities and customize their SME lending solutions.
If you are seeking SME finance, ensure you have a firm business plan, keep your financial records up-to-date, maintain a good credit history, evaluate and compare the terms of the small business loans offered by various SME lending organizations like Muthoot Fincorp before deciding on the lender.