Top 8 Business documents that improve access to Business loans – MSMEs

Our Central Government, as part of their commitment to Micro Small and Medium Enterprises, made some big announcements in the Union Budget 2023-24. Effective from 1st April 2023, one of the Govt’s schemes Credit Guarantee Scheme has been revamped with an infusion of Rs 9000 crores to the corpus —– 

  1. this would reduce the lending cost by 1% 
  2. this would provide MSMEs with an additional collateral-free guaranteed credit of Rs 2 lakh crore
  3. the limit on ceiling for guarantees was also increased from Rs 2 crore to Rs 5 crore.

As per notification by PIB on 23rd March 2023, the Govt also has taken measures to ease access to credit for MSMEs. Keeping MSMEs as the priority sector, the Govt has given MSME lending targets to Banks, towards reducing the massive credit gap existing in the market. A few other measures taken by RBI to improve the flow of credit to MSME sector are as given below : 

1.Priority Sector Lending Guidelines: In terms of Master Direction on ‘Priority Sector Lending (PSL) – Targets and Classification’ dated September 4, 2020, all bank loans to MSMEs conforming to the conditions prescribed therein qualify for classification under priority sector lending

2.Collateral requirements of MSME units: Scheduled Commercial Banks have been mandated not to accept collateral security in the case of loans up to ₹10 lakh extended to units in the MSE sector 

3.Trade Receivables Discounting System (TReDS): In order to address the problem of delayed payments to MSMEs, RBI has issued guidelines for setting up and operating Trade Receivables Discounting System (TReDS).  The scheme facilitates the financing of trade receivables of MSMEs from corporate and other buyers, including government departments and public sector undertakings (PSUs) through multiple financiers electronically

Rs. 5 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS), for businesses including MSME

Rs. 50,000 crore equity infusion through Self Reliant India Fund

 “Udyam Registration” for MSMEs, for ease of doing Business 

Source for the top 6 measures taken by RBI : PIB

All these Govt schemes & their amendments are very encouraging development for MSMEs. But, they naturally, will attract a heavy traffic of MSMEs. Every MSME would compete with others to gain access to these loans. And business enterprises with positive credit history and high credit-eligibility will have an advantage over the rest.

Why is it important for Micro and Small businesses to organise and maintain Business Documents

A large % of SMEs in India are unorganized – many could be family businesses or led by an entrepreneur who don’t have documentation in an organised manner. And they still could be availing their financing (or business loans) from local moneylenders at higher interest rates – this, in turn, leads to insufficient credit history. Because of this, they have a very little chance to get financing from Banks and NBFCs.  As per the MSME sector outlook report by Blinc Invest – Micro and Small enterprises contribute to approximately 95% of the overall credit gap. Medium enterprises are the most well served by Financiers, because they have formalized operations.  That’s why, maintaining relevant documents in an organized and accessible manner is very important for Micro and Small enterprises. Besides being disciplined about business and financial documents, they should also actively digitize finance and operations in their companies. Let’s remember one big truth – business documents are like the report card for every business enterprise.

Top 8 Business documents that Micro and Small businesses should maintain 

The owner or proprietor of every Micro or Small business enterprise should maintain this list of essential documents and have some of these documents digitized :  

Type of Business documents Business documents grouped under this 
1. Business Financial statements1a. Profit and Loss statement (shows the business revenues, profitability and their stability and progress, and the cost management over the years) 
 1b. Balance sheet (an overview of the business’s assets, liabilities etc at a specific point of time)
 1c. Cash flow statement (shows the cash inflows and outflows, and helps assess the liquidity & capacity to meet financial obligations) 
2. Bank statements (Business account)Bank statements help the bank/financier get an idea of the monthly cash flow, financial health of the business and the business enterprise’s ability to repay the loan 
3. Income and Tax Documents Banks will have a better view of the business worthiness. Income statements help the financier to evaluate the business’s profitability over a period of time. The most recent tax returns indicate the company’s income and debt-to-income ratio      
4. Tax Compliance + GST 
5. Aadhaar card + Bank Account + PAN cardThis interconnection of three documents ensure a better tracking system for all transactions 
6. Business plan / Financial projectionsA neatly structured plan for the overall business or financial projections for a specific project will be a good input  
7. Supplier and Vendor agreements + Customer contracts & invoices Timely receipt of payments show your business’s financial discipline and stability      
8. Bank statements and Payroll journals  These two statements show the business’s financial discipline 

Therefore, a neatly organized business documentation and a high credit score can empower MSMEs to negotiate better terms with their financiers and get loans at lower interest rates. A high credit score means that the borrower is less risky to lend money to – and this naturally leads to lower interest rates on the loan amount.

Do also read the article – ‘How can Small businesses improve their Creditworthiness ’ written by our CTO, Sandeep Kunkunuru.  If you need some guidance in the management of Business Documents and Digitization of your business documents, do write to us.

Credits : Jyothsna, Google, ChatGPT, Survey Reports on MSMEs

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