MSME Benefits and Drawbacks in India

The expansion of the MSME sector has unexpectedly exploded. For the working class in India, it is currently their first choice. In uncertain times, these companies act as the faltering Indian economy's stabilising anchor. Today, due to the ease with which an MSME may be run in terms of paperwork, risk, and particularly funding, it contributes about 30% to the GDP. Funding has gotten easier because many banks now provide business loans at cheaper interest rates.

Also Read: MSME Registration

A wide range of government programmes have also been launched to help startup companies. But this is not the whole story; there is also another aspect to this inexpensive finance.

The loans given to these enterprises or sectors are not without their drawbacks. These shortcomings are calling into doubt the value of the loans offered by various organisations. Let's consider all sides in order to reach a decision on whether or not to give the loans.

The benefits of MSME financing

The benefits of MSMEs and how they support business owners have been discussed in this article. Additionally mentioned were the drawbacks of MSME loans:

• Simple fund arrangements

The ease of loan arrangements is by far the biggest benefit of loans. Because MSME enterprises may readily meet the requirements, it is straightforward. Banks are also happy to lend money since they typically want to partner with emerging businesses. The loan amount is also guaranteed because the businesses are often less risky and profitable than other kinds of businesses.

• Minimal interest rates

Only the guarantee and simplicity of these loans make them unpopular. They are also preferred because of their affordable price. These loans often have interest rates between 10% and 15%, which makes them quite reasonable and simple to pay back.

• Flexibility

It also has flexibility, which is a benefit. It enables flexible borrowing and repayment terms. You are not required to pay the penalty if you make partial payments.

• Tax Benefits

Additionally, an MSME loan offers a tax benefit. By reducing the company' taxable income, taxes are ultimately reduced.

• Various loan types are offered

There are numerous loans available on the market today for small and medium-sized businesses. One can make a decision based on their tenure, risk tolerance, and capital needs. Additionally, loans are granted based on the applicant's plans for growth or for starting a new firm. In any instance, it allows flexibility to select the quantity and other details as opposed to selecting a single package that is created to meet all needs.

• Maintaining through the dangerous times

A company does not always function on profit. Gains are experienced at certain times while significant losses are experienced at others. Then, especially in the early years of the business, these loans enable a business to maintain itself in the market. By giving the entrepreneur a sense of stability, these monies increase confidence.

• Total Control

No control is shared, unlike when funding is obtained from venture capitalists and other similar sources. The owner has complete control over the business and is the only one who makes any decisions. This results in quick decision-making and distinct responsibilities and lines of accountability.

• The number of registrants has increased

One must legally register the business with the government in order to be eligible for a bank loan. Because fewer unregulated businesses are created, the government is better able to keep track of the number of regulated businesses.

Despite having many benefits, this is not always seen as a funding alternative due to the drawbacks it has, which are described below.

MSME Loans: Drawbacks and Cons

• Increasing interest

The first mistake is the amount of interest that must be paid. In the case of loans, the amount of interest due quickly mounts. Despite the fact that the interest rate is far lower than it is for other types of loans, it still adds up quickly and is expensive to pay when due. This obligation does not apply in the case of bootstrapping or angel investing.

• Difficult loan application process

Even though a large percentage of loans are accepted, the sanctioning procedure takes time. It takes a lot of time and effort to apply for an MSME loan because of the extensive documentation requirements. To demonstrate the legitimacy of the lender, documents like income tax returns, profit and loss statements, bank account information, bills of receipt and payment, and many other papers are requested.

• No security is needed.

Despite being beneficial to the lenders, this can be problematic for the banks.  The loan becomes secured when collateral is requested. It is secured in the sense that the lending institution won't lose money in the event of a bad debt. However, the majority of MSME loans are disbursed without collateral, making them unstable and dangerous for banks. It increases the likelihood of receiving bad money.

• Fees for processing

The charge paid by the borrower for loan processing results in additional expenses for the entrepreneur. This need not be paid out in the event of options like crowdfunding or angel investing.

• The full sum is not given

Sometimes the entire loan amount is not given. Typically, loans between 50% and 60% are authorised. Therefore, obtaining loans does not ensure that everything will go according to plan.Finding alternative investing possibilities in such a situation is difficult in and of itself.

• High credit rating

The majority of loans do not require collateral, as was already mentioned. The applicant's credit score must therefore be confirmed in order for banks and other lenders to accept the loan application. A person with a bad credit score is therefore not even qualified to apply for a loan.

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