Are small business loans the best way to go for MSMEs?
Date : 23.March.2018Micro, Small and Medium-Sized Enterprises (MSMEs) are thriving in today’s age even with the dual throttles of demonetization and GST. This is why the credit to MSMEs is also expected to climb at 12-15 % over the next five years1. It is also seen that the government has started a range of platforms to cater to MSMEs like MSME Sambaandh3 and MSME Samadhaan3. This all goes to suggest that MSMEs will witness better growth trajectories going ahead. In order to realize this potential and utilize the new set of opportunities that are unfolding in the business arena, MSMEs would need to work on all the aspects that contribute to its functioning. These include land and machinery, manufacturing processes, raw materials, human resources and capital. Of all these, capital stands as the most significant as it can procure all the other resources and help the MSME to stay afloat. Our work here at PrestLoans (www.prestloans.com) involves working hand-in-hand with MSMEs, trying to figure the best means of securing capital for them. With our experience and analysis that we will be presenting, we believe that small business loans that MSMEs secure from NBFCs like us, is their best option to secure capital.
Why small business loans are the best way to go for MSMEs?
1) The credit demand is only going to grow- There are banks and then there is the government with its myriad NBFC-funding schemes (that are useful in their own right) but they can only do so much to cater to the unmet credit demand for MSMEs that stood at a whooping INR 25 trillion in 20171. This kind of demand cannot be met by the limited government schemes and the limited number of trustworthy banks that provide customized schemes for MSMEs. The answer is seeking out the expertise and finance of NBFCs who can quench the demand and inject the required capital in the market.
2) NBFCs work better in the world of MSMEs- NBFCs are generally smaller organizations that have a niche in serving the need of MSMEs. This niche is what NBFCs specialize in and hone through years of experience. NBFCs ‘relate’ to MSMEs better since NBFCs themselves are generally mid-sized businesses themselves and know first-hand about the nuances of the business world. Their perspective is closer to the way MSMEs look at things. Hence, NBFCs have the skills and expertise and even the emotional quotient to work with MSMEs.
3) Small business loans from NBFCs are customizable- The schemes offered by banks and the government work under fixed silos of governance and rules. For example, the government recommends that an MSME must have a project report comprising of a few specific points in order to qualify for the government schemes2. While creating the project report is obviously a good idea, but making that rule apply to everyone may not make sense. A small business loan disbursed by a NBFC is more dynamically formed, without always adhering to a framework of rules for the sake of it. This kind of customization to the loan terms and requirements, depending on the loan-seeker’s specific business scenario works better for MSMEs.
4) Small business loans build calculated, manageable risk- It is not just about working with NBFCs but the overall mechanics of small loans that are better suited to manage business risk than bulkier loans. Even though a series of small loans probably incur more interest than one big loan, a small loan can be taken at each stage of the growth and appropriately managed. A bigger loan can lead to wealth mismanagement if there are not sufficient channels to absorb it. A smaller loan can be put to better and more transparent use, which is a heathier option for an MSME.
5) Smaller business loans are obtained more quickly- The opportunities to grow, when a business is at its maximal growth stage (which MSMEs frequently are) are quick to come and go. If an MSME undertakes a new project or secures a large piece of work or wants to develop a new technology before the competition does, then it would need to get a loan in a lesser span of time than what it takes to disburse a loan at traditional financial institutions. A small business loan is typically obtained more quickly at NBFCs like PrestLoans (www.prestloans.com) who apply advanced technology to automate credit checks, approval processes and other formalities. By using innovative operations, they further cut down on the loan turnaround time, which works harmoniously with the faster business arena of the MSMEs.
Conclusion:-
Small business loans are the most promising way for MSMEs to grow further and meet their capital demand. Contributing to about 45% of GDP4 (more than corporate India, interestingly) and employing 46 crore people4, MSME definitely need all the help they can from NBFCs to make their growth journeys successful. We at PrestLoans (www.prestloans.com) are committed to contributing to the success of the MSME sector in India, by our range of financial services and expertise.
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