MSMEs may have started out as “micro, small or medium enterprises” but they are quickly out-growing this status. Steering them on is the Indian government, which has played a strong and crucial role in helping them get their businesses started with inclusive initiatives and offerings. In addition to this, Budget 2019 has introduced an additional benefit for all GST-registered MSMEs — INR. 350 crores has been allocated for 2% interest subvention, applicable for fresh as well as incremental loans. A recent RBI Report also suggested that the MSME sector can get better access to credit by creating a INR. 5,000 crore stressed asset fund.
Now, while these initiatives are helping them forge a bigger and better identity for themselves, MSMEs are still learning how credit and loans can help them unleash their full potential. They need faster, cheaper and carefully guided access to funds to help their enterprises reach their full potential.
In the last 2 years, the CIBIL Rank has helped MSMEs gain a better understanding about their loan options and has facilitated faster, cheaper access to these business loans. How? The CIBIL Rank is a numeric summary of a company’s credit report and past repayment trends, as well as an indicator of the company’s future repayment capability. Lenders use this to help them decide whether to approve a business loan or not, as well as how much they should sanction. As MSMEs become aware of how the formal credit landscape works, they are better equipped to boost their loan-eligibility and poised to leverage business loan opportunities when they need it the most.
Here are three key points that MSMEs should keep in mind as they work towards a high CIBIL Rank (between 4 and 1 is considered optimal) and loan-readiness:
- Pay lenders on time, every single time.
Every lender-borrower relationship is an important one, especially because lenders report a borrowing company’s repayment patterns back to CIBIL — a critical factor in determining the CIBIL Rank. MSMEs should focus on paying back to their lenders on time and/or within the credit period and avoid defaulted or late payments. These timely payments will contribute to building a higher CIBIL Rank. Next time they apply for credit, a high rank plays a critical role in their loan approval process.
- Apply for credit carefully.
As MSMEs plan their growth strategies, they should look at applying for credit from the formal lending landscape. However, in an endeavor to get faster and easier access to funds, they may resort to alternative lending sources. Now, these funding sources may demand various collaterals as guarantee, and/or may push MSMEs to mortgage their valuables (even property). Most importantly, these types of loans may attract higher rates of interest.
Instead, MSMEs can avoid the debt trap by opting for lenders in the formal credit landscape with better offers, depending on their company’s credit history and repayment capability. Most importantly, MSMEs should remember to apply for only as much credit as they truly need — this can help them stay out of the debt trap.
- Check the CIBIL Rank and company credit report (CCR) regularly.
CIBIL Rank is a reflection of an MSME’s financial well-being and repayment capability. Constantly monitoring the rank and CCR will help them monitor their credit transactions, and identify inaccuracies, if any. Moreover, the closer the company’s rank is to 1, the better are its chances of loan approval.
And here’s why this is a crucial step: some lenders such as Bank of Baroda and the Oriental Bank of Commerce offer MSMEs a discounted rate of interest on business loans based on their CIBIL Rank. MSMEs should monitor their CIBIL Rank and CCR regularly so that they are loan-ready to leverage these offers when the opportunities arise.
MSMEs can leverage their access to credit to unleash their potential, starting today. They should actively work towards boosting their business’ loan-eligibility and credit health with a high CIBIL Rank — a key factor in helping them get access to credit in the future.