How to reduce EMI burden on your MSME loan

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10 Jun,2022 17:50 IST 276
How to reduce EMI burden on your MSME loan

Micro, small and medium-sized enterprises (MSMEs) are vital for the economic development of a country. But like startups, finance is a crucial constraint faced by most of these enterprises. 
In a developing economy like India, MSMEs are critical as they employ millions of people, promote industrialisation in rural and semi-urban areas, and boost domestic production. 
Globally, SMEs account for more than two-thirds of jobs. In developing countries, these small businesses are a major contributor to social and economic development.

What is an MSME loan?

Any business loan or credit facility offered to micro, small and medium enterprises to meet their financial needs is classified as an MSME loan. 
While small-ticket MSME loans are offered without any collateral, lenders can ask for a collateral to sanction larger loans. The collateral can be land or a residential or commercial property.

Who offers an MSME loan?

There are many banks and financial institutions that offer MSME loans. The duration and the interest rates of MSME loans vary from lender to lender. The interest rate on MSME loans depend on numerous factors like size of the business, credit score and annual turnover.

Who can get an MSME loan?

In addition to MSMEs, small business owners, women entrepreneurs, self-employed professionals, startups, sole proprietorship and partnership firms, manufacturing and service-based undertakings of small and medium size can get funding through MSME loans.

Purpose of an MSME loan

MSME loans are generally taken to meet working capital needs, expand business, buy fixed assets, upgrade infrastructure, and marketing.

Ways to reduce EMI on an MSME Loan

MSME loans are helpful. But the cycle of repaying the loan can go on for many years. So, timely repayment of the loan through equated monthly instalments, or EMIs, is vital as you may end up paying a high penalty to banks for late payment. Timely payment of EMI also helps you qualify for better loan rates in the future.
But are you paying a hefty interest on your loan? Is high EMI bothering you? If you are thinking about how to reduce your EMI on MSME loans, here are a few tips to help lessen the burden:

Borrow as much as is required:

Though MSME loans are smaller loans offered for a shorter period of time, it is important to decide the right amount because even a small extra amount can make a huge difference. So, business owners must calculate their expenses and borrow as little as possible. 

Check interest rates on loans:

Compared to normal business loans, MSME loans have a higher interest rate. Borrowers should compare figures and choose the bank that offers the best deal. 

Maximise the payment tenure:

Business owners should consider taking loan for a longer period because the EMI amount on a loan is inversely proportional to the tenure of the loan. So, EMI payments decrease with an increase in tenure. 

Pay extra EMI whenever possible:

Prepayment is a great way to bring down the outstanding principal amount and to reduce the loan tenure. It is also a great way to lessen the interest burden and to reduce the total number of EMIs.

Refinance the loan:

Through refinancing a borrower can replace the current debt obligation with a new loan and an updated agreement. Through this method, business owners can get a fresh loan at a lower interest rate and lower EMI. But refinancing isn’t always a smart move. So, MSMEs must consider all possibilities and then decide.

Things to contemplate while taking an MSME loan

Funds are an integral part of a business. So, business owners must keep note of certain points before taking a MSME loan: 
Check and evaluate the company policies for any hidden costs. 
Negotiate with the lenders for lower EMI and less interest rate as less monthly payment means more savings and more working capital in hand.
Checking the prepayment option on MSME loans with the bank. 

Conclusion

Timely access to finance and complex documentation required for loan approval are among the major challenges for the MSME sector. 
If you are facing similar challenges, most banks and financial service providers like IIFL Finance have different types of loans and schemes to lift your business. 
IIFL Finance, for instance, offers small business loans of Rs 10 lakh and Rs 30 lakh without any collateral and with repayment tenure of up to five years. 
Moreover, it allows borrowers to align the loan repayments with their own invoicing and cash flow cycles. The company also offers loans up to Rs 10 crore with a repayment period of up to 10 years if the MSME has a property or land to keep as collateral.

Disclaimer: The information contained in this post is for general information purposes only. IIFL Finance Limited (including its associates and affiliates) ("the Company") assumes no liability or responsibility for any errors or omissions in the contents of this post and under no circumstances shall the Company be liable for any damage, loss, injury or disappointment etc. suffered by any reader. All information in this post is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results etc. obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. Given the changing nature of laws, rules and regulations, there may be delays, omissions or inaccuracies in the information contained in this post. The information on this post is provided with the understanding that the Company is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. This post may contain views and opinions which are those of the authors and do not necessarily reflect the official policy or position of any other agency or organization. This post may also contain links to external websites that are not provided or maintained by or in any way affiliated with the Company and the Company does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites. Any/ all (Gold/ Personal/ Business) loan product specifications and information that maybe stated in this post are subject to change from time to time, readers are advised to reach out to the Company for current specifications of the said (Gold/ Personal/ Business) loan.

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