Over the last few years, India has established itself as one of the strongest and fastest-growing economies in the world. Young entrepreneurs are prominent driving forces, with MSMEs contributing over 40% to the country’s GDP. However, complications like payment delays, sudden surges in demand, and increased expenses make business management challenging for small business owners. Many of them get an MSME loan to ensure better cash flow and get the required funding, but sometimes, poor loan handling and management lead to a loss of infrastructure, finance, and business growth.
Young entrepreneurs looking for a small business loan must follow these valuable tips to manage their finances better and get out of the financial crunch sooner.
Determine the Purpose of Taking the Loan
Determining the loan’s purpose helps in using the loan correctly, deciding the loan amount, and making a robust repayment plan. While young entrepreneurs struggle with a financial crunch at times, a loan may distract them from their end objectives.
Many lending institutions extend small business loans for business growth and expansion. However, the business owner must have a clear plan to use the loan amount to fund their expense. Whether the entrepreneurs take a loan to spend on marketing, hire employees, buy inventory, or build working capital, they must use the loan prudently and stick to the plan.
Calculate Expenses and Borrow the Minimum amount required
Many NBFCs in India provide generous loan amounts according to the applicant’s eligibility and credit rating. However, young entrepreneurs should never over-borrow. It is best to calculate the intended expenses beforehand and borrow only the amount that they require.
Borrowing more than they need will put unnecessary pressure on the business finances and make repayment difficult due to added MSME loan interest rate. Besides that, if they borrow an enormous amount, their loan tenure will be longer, their EMIs will be bigger, and they will pay more interest outgo by the loan term-end. Therefore, entrepreneurs must borrow only the required amount to cover their immediate expenses.
Confirm Loan Eligibility
Entrepreneurs must check whether they qualify for a loan or not before submitting their application form. Checking this before applying for an MSME loan ensures their credibility does not drop due to multiple loan inquiries within a short time. Several hard inquiries on the credit report reduce the applicant’s credit score even if the loan gets approved.
Most NBFCs have eligibility conditions related to the applicant’s age, business age, and nature, credit score, etc. Therefore, before applying for a small business loan, the young entrepreneur must check the lending institution’s eligibility criteria and ensure fulfilment before applying.
Select a Suitable Repayment Term
Many NBFCs have flexible repayment terms that borrowers may choose according to their monthly budget and repayment capacity. They provide a wide time window for repaying the borrowed amount. Selecting a longer loan term leads to smaller EMIs, while a shorter loan term may make the EMIs heftier. However, borrowers end up paying a higher interest outgo with a longer loan term and save money by choosing shorter loan tenure.
Both term durations have pros and cons. The best idea is to make a monthly budget and select the shortest possible loan tenure with affordable EMIs. By doing this, the borrower can save money on the interest outgo and, at the same time, keep EMI payments manageable.
Create a Repayment Plan
Deciding how to repay the loan and creating a repayment plan should happen even before applying for an MSME loan. Loan repayment is one of the most crucial aspects of borrowing a business loan. Any delay in the EMI repayments will reflect poorly on the borrower’s credit report, and taking more loans in the future may become challenging for them.
Therefore, the best tip for young entrepreneurs is to create a repayment plan and stick to it during the loan term. To build an effective repayment plan, the borrowers must be clear about their expenses, calculate costs, determine their financial obligations, and borrow according to their needs.
MSME loans are excellent tools that help young entrepreneurs fund their planned or unplanned business expenses. By doing due diligence using the tips mentioned above, borrowers can select the right loan offer, enhance loan approval chances, and make repayment easier while preventing complications. Evaluating the MSME loan carefully, allocating it cautiously, and repaying it on time helps a young borrower make its impeccable use and get the desired outcomes to support business growth.