How MSMEs can get NBFC loans without mortgaging the assets

Image source: FILE However, the advent of cash flow based loans has made it much easier for MSMEs to obtain credit, albeit at a somewhat higher interest rate to cover the additional risk of lenders. In such scenarios, the interest rate is determined based on the risk profile of the borrowers.

For MSMEs, sustained funding is the difference between success and failure. Without timely credit, it would be nearly impossible for small businesses to manage their operating costs. According to the 2019 RBI report, the MSME segment had a credit spread of around Rs20-25 lakh crore.

Previously, MSMEs could access credit through guaranteed loans. Since banks and NBFCs (non-bank financial corporations) had assets pledged, lenders extended loans at comparatively lower interest rates. Yet, collateral-linked loans presented a major challenge for small entrepreneurs who lacked assets that could be pledged.

Advent of cash flow based lending

However, the advent of cash flow based loans has made it much easier for MSMEs to obtain credit, albeit at a somewhat higher interest rate to cover the additional risk of lenders. In such scenarios, the interest rate is determined based on the risk profile of the borrowers.

In recent years, the cash flow model has become fashionable after banks and NBFCs realized that many MSMEs could not opt ​​for asset-based loans. While new-age lenders such as NBFCs and fintech companies were the first to realize the potential of cash flow-based lending, banks and other traditional lenders only later followed suit. Today, legacy lenders are taking a hands-on perspective while offering the new lending option, as the rise of new entrepreneurs and the division of family assets means that adequate collateral is not always available.

Nevertheless, MSMEs have to follow specific guidelines to obtain unsecured cash flow based loans. The main pre-requisite is that business promoters must disclose adequate business data so that potential lenders can assess the financial situation of the business in the short and long term.

This data may include information from alternative sources such as digital transactions related to RTGS, NEFT, IMPS, UPI and GST. During due diligence, computer statements, bank statements, point of sale (POS) data and other sources are also considered. Additionally, credit history with timely repayments is considered the hallmark of responsible borrowers. The past and present growth of the business is also taken into account in determining the interest rate.

Obstacles to obtaining data

Unfortunately, obtaining relevant data from MSME promoters is not easy. This is mainly due to the mindset that a better credit rating can be maintained by not disclosing all information. Most MSMEs remain reluctant to share GST data or bank details. Such an approach is as counter-intuitive as patients refusing to reveal all symptoms to the doctor. Without relevant data, the creditworthiness of potential borrowers cannot be assessed by lenders. As a result, loan applications are turned down, leaving deserving MSMEs wondering what went wrong.

Apart from data sharing, another requirement is that MSMEs must ensure that the credit is used specifically for the purposes mentioned in the loan application. Also, regardless of the amount of their participation, promoters must accept full responsibility for the management of the enterprise. Promoters with a lazy or independent approach to business do not inspire confidence in lenders, making it difficult to approve loans even in deserving cases.

The other covenant is that repayments must always be made on time in accordance with the EMI schedule (equivalent monthly installment). Even a single missed or delayed payment has an impact on credit rating. As a result, these MSME promoters will no longer receive advanced loans in the future due to their poor credit history.

Given the challenges, MSME developers should keep all aspects in mind before applying for a loan from NBFCs. If more information is disclosed, the chances of approval are higher – at competitive interest rates.

There is no doubt that cash flow based lending has saved many small businesses hard hit by the pandemic. Without funds to manage even day-to-day expenses, many closed while others were about to close. However, thanks to cash flow-based credit, these businesses survived these tumultuous times to thrive thereafter. Hopefully such success stories will continue to emerge each year.

By Deepak Aggarwal, Co-Founder, Moneyboxx Finance

(Disclaimer: The opinions expressed in this article are those of the author. They do not reflect the views of India TV)

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