How To Reduce The EMI Burden On Your MSME

Micro, small and medium enterprises (MSME), the driving force of the Indian economy, are critical for the development of the country. But there are several growth restraints for MSMEs—finance being one of them.

The government is trying to introduce several economic reforms to boost development in this sector, but strict eligibility criteria and the lengthy procedure of the banks dampen the chances of getting loans. Furthermore, a few business owners and entrepreneurs dread the cycle of loan repayments that can go on for years.

MSME loans are collateral-free loans offered for a shorter period of time. They are helpful in balancing the cash flow as receipts from clients can get delayed while vendors and employees need to be paid on time.

For many, the regular equated monthly installment (EMI) amount can be a hurdle. But with a little planning one can reduce the EMI on these loans. Here are a few ways to achieve it:

• Borrow What’s Required:

The underlying principle of a loan is to borrow sensibly. While additional loans can be an extra burden, a loan amount lesser than what is needed may fail to fulfill the business goals.

Business owners must carefully evaluate and then present a rough estimate of the total money required in a business. A well-calculated loan for a shorter term helps to minimise EMI burden.

• Negotiate The Interest Rates:

The interest rate on MSME loans vary among banks and non-banking finance companies (NBFCs). Loan applicants should compare figures and choose the lender that offers the best deal.

• Pre-Pay:

If the business is running smoothly and the borrower can allocate extra money to pre-pay part of the loan, one should pay it. Thereby, the total interest one pays out in effect reduces. But one should consider the pre-payment charges while calculating the full cost.

• Refinance The Loan:

Refinancing is a good way to reduce the EMIs and obtain more favourable borrowing terms. Most borrowers choose to refinance when interest rates drop. It helps to save the extra cash that can be used later. This can be done with the same or a different lender. But while transferring a loan to a different lender, a borrower should compare the cost of loan transfer against the interest rate benefit.

• Increasing The Tenor:

The interest rate on a loan is inversely proportional to the tenor of the loan. Taking a loan for a longer period helps to distribute the total amount over a longer time and reduce the EMI burden.

Conclusion

MSMEs not only help to expand the prospects of employment to the remote areas of India, but also serve as a feeder to big businesses. Still, there are many growth restraints that prevent this sector from reaching its full potential. The EMI burden on the MSME loan is one of several challenges.

Business owners must weigh and evaluate every aspect of the business loan to reduce the EMI and keep a track of the environment to see how they can reduce the EMI burden via refinancing or pre-payments, if required and if the cash flows permit.