How do financial institutions help MSMEs manage their cash flow?

Cash flow can be defined as the total amount of money entering and leaving a business. Managing cash flow can have a significant positive impact on the financial health of a business. Every business, big or small, should regulate its cash flow to keep it running smoothly.

However, MSMEs (micro, small and medium enterprises) need to be particularly careful in regulating cash flow to avoid a liquidity shortage. This is because a small business cannot afford to spend more than it earns.

MSME eligibility

Be classified as MSME and be eligible for a ready for MSME, a company must meet the following conditions:

To be considered a micro business, the total investment must be less than 1 crore and the annual turnover must be less than 5 crore.

To be considered a small business, the total investment must be less than 10 crore and the annual turnover less than 50 crore.

To be considered an average business, the total investment must be less than 50 crore and the annual turnover less than 250 crore.

MSME registration can be done through the Indian government registered portal.

For short-term financial emergencies such as paying employee salaries and managing inventory, an MSME may qualify for a working capital loan. The working capital loan is a type of Commercial loan that small or medium-sized businesses can use to finance their day-to-day operations. Such a loan will help you overcome the temporary shortage of cash.

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Why do MSMEs have problems getting a business loan?

Factors that contribute to a small business’s limited access to business loans include:

  • Information asymmetry – Information asymmetry occurs when one party to an economic transaction has more knowledge than the other. Most MSMEs in India are informal in nature and operate in relatively unknown sectors. This exposes them to greater information asymmetry and the risk of failure. As a result, banks are reluctant to extend loans to MSMEs.
  • Lack of relevant documents – Very few MSMEs have enough assets to present as collateral. In addition, banks that provide loans to MSMEs require important documents such as certificates of incorporation. Therefore, in the absence of documentation, banks would be reluctant to offer loans to these companies.
  • Inefficiencies in the treatment: Most MSMEs use manual processes to carry out their day-to-day operations, which can incur costs and result in unnecessary expenses. These inefficiencies, in turn, can negatively affect cash flow and record keeping, which can lead to problems with the use of resources. ready for MSME.
  • Common perception as low-performing businesses: Compared to large companies, most banks and financial institutions consider MSMEs to be a low performing sector. Therefore, fearing insufficient returns, most credit institutions do not lend money to these companies.

Lack of access to formal credit due to the factors mentioned above has forced MSME owners to obtain funds from informal lenders, including friends and family.

This is an unfortunate circumstance not only for small business owners, but also for society as a whole. Because even if the informal loan is easy to access, the interest rate can range from 3 to 10% per month.

This is where a working capital loan can help tremendously.

Characteristics of a working capital loan

Here are some of the notable features of the loan:

Generally, working capital loans are for a short period which can range from six months to three years. However, the length of the loan depends on the financial institution lending the money.

These loans offer lower amounts of money than term loans. The loan amount varies according to the different financial institutions. Some companies can even provide working capital loans of up to 2 crore.

Time is an asset with working capital loans. Most MSMEs need a loan which is processed within days. Working capital loans can be spent within 2-3 days.

  • Online application and processing method:

Nowadays, most financial institutions offer online loan application and processing modes. This means that MSME owners will not have to wait in long lines to apply for their loans.

Generally, working capital loans are unsecured. This is a fairly important feature for small business owners who do not own any assets.

  • Satisfactory interest rates:

Working capital loans have minimal interest rates. The actual interest rates depend on the lending financial institution and the borrower’s credit rating.

No fees or hidden costs apply in the case of working capital loans. They only require a one-time processing fee.

Borrowers of working capital loans can apply for flexible repayment depending on their financial situation. In addition, there is also a provision to anticipate the loan at any time, provided that the first IME is paid. This would not incur any additional costs.

How to analyze your MSME’s cash flow

The first thing you should note here is that a business’s cash flow and income statement are unrelated. However, cash flow is directly related to the working capital of a business. It may also vary depending on the following factors:

While profits and cash flow are not related, it is necessary to understand the break-even point of your business. The breakeven point should be your primary financial goal. Once your MSME has made its first profits, the cash flow can be managed more efficiently.

When it comes to business, cash flow is the most crucial aspect. In addition, cash becomes even more crucial in the case of MSMEs. Each quarter goes through your account register.

Through a quarterly assessment, you should analyze the departments where the bulk of the money is spent. Take a closer look at your inventory, as maintaining unnecessary inventory can significantly deplete your money.

  • Speed ​​up the recovery process

If you are an India based MSME, you need to go the extra mile to make sure you get your money back. This may include streamlining the process for settling all pending invoices.

Unpaid invoices can hurt your small business financially. Therefore, you should always make sure that your customers are paying adequate bills.

How do financial institutions help MSMEs control their cash flow?

MSME owners need to educate their business as much as possible. The increased revenue generated by brand awareness can be used for the growth and expansion of their small business.

If your MSME is in its start-up phase, managing cash flow can be quite a difficult task. Financial institutions offering business loans like the working capital loan can be of great help in this regard.

At Ziploan, you can enjoy a moment most competitive interest rate loan to help take your business to the next level. To find out more about our loan facility, please do not hesitate to call us at 011 – 4310 – 9577.

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