Guide to Collateral and Security Requirements for MSME Loans

• Posted by Deepika Dhiman Oct 24 Filed in Business #msme loan  #business loan  #loan  #loan app  6 views
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  The growth of Micro, Small, and Medium Enterprises or MSMEs is very important for the overall economy to grow and develop. You may wonder how. Well, let's see. Recent statistics show that MSMEs contributed 40% of the total exports of the country. Further, their gross value added to the country's total GDP stood at 29.1% in 2021-22.¹ 

  Considering their significant impact, government and other financial institutions tend to support these MSMEs via MSME loans. Now, before you apply for these loans, let's see what MSME loans are and what are their collateral and security requirements. Understanding these aspects can help you make an informed decision. 

   

  What are MSME Loans?

  MSME loans are financial products designed particularly for small businesses and entrepreneurs. These loans are aimed at helping MSMEs with adequate capital requirements whenever needed. 

   

  What is the Difference Between Collateral and Security?

  Now that we know the importance of MSMEs and MSME loans, let's proceed further with some crucial aspects of MSME loans: collateral and security. Individuals often use these terms interchangeably. However, there might be a slight difference in reality. 

  A collateral is a physical property or asset that is a security to borrow a loan. Security for MSME loans, on the other hand, is insurance and guarantees.  

   

  Understanding the Collateral and Security Requirements for MSME Loans 

  Now that we know the basics of collateral and security, here are some collateral and security requirements of MSME loans. 

  Collateral for MSME Loans: 

  Here are some popular collateral types:

  • Inventory 

  Maximum lenders help you borrow easily with your inventory as your collateral. Inventory is the company's assets on its balance sheet. 

  • Equipment and Machinery 

  Several financial lenders also help you borrow using your equipment as collateral. These are commonly used for business or product line expansion. 

  • Real Estate 

  Property, for example, commercial buildings or lands, are the most easily accepted form of collateral requirements.

  • Accounts Receivable 

  The pending payments of your customers, that is, accounts or invoices receivable, can also be used as collateral. 

  Types of Security Measures for Collateral-free MSME Loans: 

  The financial market is changing in recent days. It has become more flexible. Not only are the financial agents accepting physical assets, but they have become more accepting of non-conventional options like security measures. Here are some security options you may use to avail of collateral-free loans.

  • Insurances

  The insurance coverage of businesses can also be used as an asset to avail of MSME loans. This ensures your ability to repay in case of loan defaults. 

  • Personal Assurances 

  The financial lenders might lend you based on your guarantees. This assures them that they can seize your personal assets in case of defaults.

  • Third-Party Guarantee 

  Some lenders may ask for extra assurance or third-party guarantee from your business partner, or associates. 

  • Unsecured Loans

  You can also avail of unsecured loans in case you don't meet the collateral requirements. However, you must understand that the eligibility and repayment terms of such loans are more rigid and stricter.

  What Affects Collateral and Security Requirements?

  Here are a few factors that impact the collateral and security requirements of your business loans. 

  • Policies of the Lender

  Different financial institutions have different policies, influencing the collateral requirements. Thus, it is always better to compare all your options and see what favours you the most. 

   

  • Amount

  Your loan amount is also one of the factors affecting collateral and security requirements. For example, lower amounts might have flexible policies, however, big amounts require robust security requirements. 

   

  • Business Type

  Factors like the type of business, associated risks and profits also make a huge difference.

   

  • Business Credibility 

  Your business credibility or a robust history with timely loan repayments can help you reduce the stress of rigorous security requirements. Your credit history helps your lenders see you in a positive light. 

  Wrapping it Up

  MSME loans can help businesses with their short and long-term financial goals. However, before you apply for MSME loans, always make sure to check and understand the security and capital requirements. Try managing your assets and improving your credibility to meet these requirements. Make the most out of these loans, let your business grow, thrive and attain a new height of success.