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Lessons on Business Loans to Learn from Successful SMEs

  • Highlights

  • Having adequate cash flow is vital

  • High credit score is the key to smooth loan approval

  • Opting for a Flexi Business Loan is beneficial

  • Keeping the right documents ready is important

Small and medium-sized enterprises (SMEs) play an important role in the growth of the Indian economy. As per the latest government data, the share of Micro, Small & Medium Enterprises (MSMEs) as a percentage of GDP stands at 30.74%.
Business needs funds to leverage their business needs. In order to keep the business operations running smoothly, they borrow funds from external sources such as the Non-Banking Financial Companies (NBFCs). The share of NBFCs and the housing finance companies in the pie of the total credit has been 18% in FY17, recording a growth of 28% over FY16. They have emerged as the vital source of finance for SMEs.
. Knowing the importance of business loans in the success of their business, visionary SME owners make all the right moves to avail a business loan.

What Can We Learn from Successful SMEs?

1. Having Adequate Cash Flow Is Vital

While extending business loans, lenders peruse the current liquidity of the company to understand whether it can service the loan. They assess the liquidity ratios to know whether their loans can be repaid, in case the company’s business plan fails to take off. The two most important current liquidity ratios are:

- Current Ratio = Current Assets / Current Liabilities
- Debt-Service Coverage Ratio (DSCR) = Net Operating
Income/Total Debt Service.
Some of the current assets include cash, short-term investments, inventory, and payments yet to be made by the clients. The significant current liabilities are bills, salaries, and loans.
The liquidity ratio differs across the various industries. The growth-oriented SMEs maintain the ratios as per the norms of their specific domain to easily avail the loan at nominal business loan interest rates.

2. High Credit Score Is the Key to a Smooth Loan Approval

Credit score makes for a very important consideration for the loan approval process. SMEs do not want any red flags to become the spanner in the wheel of their expansion. They keep a credit report, and monitor it regularly to pre-empt any fall in the credit score. Some of the ways of maintaining proper financial hygiene are:
-Clearance of all dues in time, and no loan defaults
-Maintenance of the 30% rule of credit utilization (as the case may be)
-Quick redressal negative customer remarks
The credit reports can be sought from any of these credit information companies such as Crisil, Equifax, Experian, TransUnion CIBIL, and CRIF High Mark.

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3. Opting for a Flexi Business Loan is Beneficial

Flexi Business Loan allows the borrowing company to avail finance without utilizing the whole loan limit, to fund their business needs. This helps them to keep their liabilities low, since they do not have to pay interest on the whole loan limit. For example, if a business knows that it will record profits in 3 years; time, it can take a business loan for a term of 3-4 years, and repay the principal at the end.

At the same time, it can repay just the loan interest monthly, and maintain a low current liability. This method prevents the current ratio and the credit score from going down. Simple illustration:
ABC company avails a loan of Rs. 5 lakh, at 20% interest rate for 3 years.
The interest for the tenor of 3 years comes to Rs. 3 lakh. The company pays Rs. 8334 per month, and repays the principal at the end.

4. Keeping the Right Documents Ready is Important

Visionary SMEs keep their documents neatly filed. Missing key documents does not fit their work culture. They are able to furnish all the details that the NBFCs ask for. Some important documents include business vintage proof,KYC and relevant financial documents.

5. Money Begets Money

One needs to pay to reap monetary benefits. In business loans, there is the commitment to pay back the loan amount along with the interest. The business loans help the company to earn profits. Thus, money draws money.



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