Introduction
MSMEs are essential parts of the Indian economy. Such enterprises give people employment and are hence a very significant contributor to the wholesome development of the nation. Many MSMEs, however, face financing challenges, especially on the side of accessing financial requirements. Whether you are creating a business or growing it, getting a loan that has good conditions is essential for the growth of your MSME.
MSME loans are provided by various banks and NBFCs in India. However, the terms of the loan can differ based on the bank or institution funding it, such as interest rates, repayment terms, or any collateral required. Thus, negotiation is crucial for saving on costs while ensuring smooth repayment terms.
Here are seven effective strategies that can help you acquire better terms on your MSME business loan.
7 Tips for Negotiating Improved MSME Business Loan Terms
1. Business Plan Creation
A well-prepared business plan is a very essential tool in acquiring a favorable loan. Your business plan should indicate your business model, target market, and financial projections. Lenders will determine your capability to repay the loan, and a well-prepared business plan can raise confidence in them.
Your business plan should cover the following:
- A detailed financial statement.
- A well-defined plan of how the loan amount will be used.
- Details regarding market potential and growth strategy.
- A strong business plan reduces the risk from the lender’s point of view, thus lending them to require lower interest and favorable terms.
2. Maintaining a Healthy Credit Score
A credit score is the most important factor for deciding the terms and conditions of your MSME loan. Before lending, the lender checks business credit as well as your personal credit history. A better credit score, typically, leads to lesser interest charges and better loan terms.
How to maintain or improve your credit score:
- Pay all timely repayments for loans and credit cards that you already have.
- Keep the credit utilization ratio low.
- Keep checking your credit report for errors and ensure that it is accurate, if any.
The better you show that you handle your credit responsibly, the more willing the lender will be to deal with you on prime arrangements.
3. Government Schemes for MSMEs
The Indian government has framed government schemes and subsidies for MSMEs that ease their growth. Credit schemes most of the time ensure lower interest rates, extended periods of repayment, and low collateral from the customers.
Some of the popular schemes introduced by the government are as follows;
- Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): Available without collateral.
- Pradhan Mantri Mudra Yojana (PMMY): Offered at low-interest rates up to ₹ 10 lakh.
- Stand Up India Scheme: Loans to SC/ST and women entrepreneurs to establish new ventures.
4. Make sure you compare financial institutions.
Try and research several different lenders, and understand which one will fit you and your business requirements.
Compare lenders based on the following critical parameters;
- Interest rates- fixed or floating
- Processing charges and other hidden charges
- Flexibility in repayment and tenure options
- Collateral requirements.
- Compare quotes from several lenders with the best deals available to negotiate a better deal.
5. Strengthen Your Cash Flow and Financial Statements
Lenders will be satisfied with the businesses that have good cash flow and strong financials. Cash flow strength proves that your business can make timely repayments, and you will probably get favorable loan terms. Monitor your sales and revenues and eliminate unnecessary expenses to improve your financial statement.
Review your balance sheets, profit and loss accounts, and cash flow statements periodically.
If your financial statements are clear and accurate, the better the lenders know you are in the prime position to meet your loan repayments and, thus, to get better terms.
6. Negotiate Terms for Collateral
Generally, an business loan requires collateral. However, you can bargain on the term with regard to your collateral to reduce your financial risk. For example, there are different kinds of collateral you can use with a lender which can be in the form of equipment inventory, or even real estate.
If the business is financially stable and the entrepreneur has a good credit history, then borrowing money with little or no collateral may be possible. For instance, some government schemes like CGTMSE offer loans on a no-collateral basis; thus, MSMEs can get loans at better terms.
7. Build Strong Credit Arrangements with Lenders
You establish a long-term connection with the lender while negotiating for a better deal. If you have an excellent relationship with a bank in your business dealings, they are more likely to do business with you based on given terms especially if you have a good repayment history.
You can earn the trust of lenders through the following;
- Keeping them fully informed.
- Repaying any previous loans on time.
- Keep them updated on your business’s progress and financial health.
A good relationship with your lender will guarantee flexible terms and easy approvals for future loans.
Conclusion
Maintaining a good credit score for a business, coupled with attractive government schemes, and comparing offers from different lenders, would help negotiate better terms of the offer suitable for the needs of the business. Strengthening the financial statements, negotiating collateral, and developing a long-term relationship with the lenders can make a huge difference in deriving favorable loan conditions with good tenures or terms.
NBFCs are a better alternative for a business loan for MSMEs. Often, the approach followed by NBFCs is more flexible and accommodating than that of regular banks, with quicker processing times, easier eligibility criteria, and customized loan products tailored to the MSME sector. Thus, for most MSMEs, especially when there is a sudden urgent need for funds or less stringent collateral requirements, NBFCs are normally the preferred choice. In doing so, MSMEs are able to utilize the funds that they require and also to ensure long-term financial sustainability.
