Micro, small and medium enterprises (MSMEs) contribute heavily to the Indian economy. To ensure growth and sustainability, many MSMEs turn to financial institutions for funding. Although getting MSME loans has become a lot easier, there are still certain considerations to keep in mind to avoid delays or rejections.
In this article, we will look at some of the most common MSME loan mistakes that borrowers often make. You can significantly improve your chances of getting funding by simply avoiding the MSME loan approval mistakes outlined in this guide.
Top Mistakes to Avoid While Applying for an MSME Loan
From ignoring the eligibility criteria to not managing the credit score properly, borrowers make a lot of mistakes that lead to MSME loan application issues. As a potential MSME loan borrower, here are 10 major errors you must avoid.
Ignoring the Eligibility Criteria
Not checking the eligibility criteria thoroughly before applying for a loan is one of the MSME loan approval mistakes many borrowers make. If you do not meet the laid-out criteria, your application will most likely be rejected outright.
When assessing your eligibility, look into factors like your business type, turnover and years of operation to ensure that it aligns with the lender’s requirements. To improve your chances of approval, always read the fine print and consult with your lender to clarify doubts before applying.
Incomplete or Incorrect Documentation
As part of the MSME loan application process, the lending institution will require you to submit certain documents. These will typically include your identity and address proof, business registration and licenses, bank and financial statements and tax returns, among others. Lenders rely on these documents to evaluate your credibility and business potential.
Submitting proper documentation is crucial since missing, inaccurate or outdated documents are among the most common MSME loan mistakes that result in delays or denials. Even a small mismatch in the name or business address can create serious MSME loan application issues and harm your credibility. As a potential borrower, you must ensure that all of the documents you submit reflect accurate information. If not, take steps to rectify the discrepancies in the documents before applying for the loan.
Poor Credit Score Management
Many business owners underestimate the importance of creditworthiness, which is one of the major mistakes to avoid in MSME loan applications. For many entrepreneurs, especially sole proprietors, the credit score plays a major role in determining loan eligibility.
The higher your credit score, the higher the chances of your loan request being approved. On the other hand, a low score indicates poor financial health and can lead to higher interest rates or outright rejection. If your credit score is below 700, consider taking measures to increase it before applying for a loan. Also, remember to monitor your credit reports regularly so that you can resolve any discrepancies immediately.
Lack of a Clear Business Plan
When applying for an MSME loan, one of the key things you must submit is a business plan. It must include detailed financial projections, expected return on investment (ROI) and how the loan will improve operations or profitability.
Submitting a vague or overly optimistic business plan is one of the mistakes to avoid in MSME loan applications. A well-drafted, comprehensive business plan demonstrates credibility and shows that you are serious about growing your business. Lending institutions are more likely to approve loans to borrowers who display such qualities.
Applying to Multiple Lenders Simultaneously
Many business owners strongly believe that applying to several lenders increases their approval chances. Unfortunately, this is among the most common MSME loan mistakes. Now, whenever you apply for a loan, the lending institution will conduct a hard inquiry on your credit report.
Multiple hard inquiries within a short span of time can negatively impact your credit score, which further lowers your chances of approval. Instead, the right approach would be to shortlist the most suitable lenders after thorough research and apply to just one or two institutions with the highest chance of approval. This way, you can protect your credit score from tanking due to hard inquiries.
Overlooking Loan Terms and Conditions
Another one of the critical mistakes to avoid in MSME loans is accepting the terms and conditions without reading through or analysing them. Many borrowers in a rush to get access to funds skip this important step. The lack of attention to the fine print can result in unexpected charges, penalties or unfavourable clauses.
As a business owner, you must read every clause carefully. Look into aspects like interest rates, processing fees, repayment tenure, prepayment penalties and other hidden charges. If there are any ambiguities, discuss with your lender and get them clarified before signing the agreement. Being fully informed helps you make better decisions and avoid financial stress down the line.
Misjudging the Loan Amount
When applying for an MSME loan, you must always make sure to request the right amount. Requesting an unrealistic amount without a solid rationale is one of the many MSME loan application issues that raise red flags with lenders.
When determining the loan amount, consider your actual business needs and repayment capacity. Overborrowing leads to a strain on your finances, whereas under borrowing may not fulfil your needs. Also, remember to justify the loan amount clearly in your business plan to increase the chances of approval.
Not Maintaining Proper Financial Records
As you have already seen, financial statements are one of the many documents you must submit when applying for an MSME loan. This is because the financial records offer a snapshot of your business’s health, and lenders heavily rely on this data to evaluate your loan request.
If you do not maintain updated books of accounts, you could run into MSME loan application issues, delays or rejections. Furthermore, inconsistent or unverified financial records are seen as red flags. Therefore, make sure your balance sheets, income statements, and cash flow reports are accurate and professionally prepared before submitting a loan application.
Failing to Provide Collateral or Required Guarantees
For certain MSME loans, lenders may ask for collateral or guarantees. Not arranging these in advance or misunderstanding their requirement is one of the critical MSME loan approval mistakes you must try to avoid.
If you are applying for a secured loan, you should be clear about what assets can be pledged and ensure proper valuation and documentation. Failing to comply with this requirement can result in loan rejection, even if all other factors are favourable.
Relying Solely on Government Schemes
Although there are several government schemes offering MSME loans, relying exclusively on them is not advisable. As an entrepreneur looking for funds to grow your business, you must explore all possible avenues for capital. This includes private banks, NBFCs and fintech lenders, which often have faster processing times and more flexible repayment terms.
Conclusion
Applying for an MSME loan is a significant step in your business journey. However, a lack of preparation and awareness can create avoidable roadblocks. By understanding the common MSME loan mistakes and actively working to avoid them, you can enhance your chances of success.
Although different lenders might have varying requirements, the fundamentals often remain the same. As long as you submit proper documentation, a sound business plan and a clear purpose for the loan, your chances of securing a loan will be high.
