Should You Take That Loan? A Guide for MSMEs
Debt can be a powerful growth tool for businesses—but only if used wisely. For many MSMEs, loans are often the go-to option for funding, but not every situation calls for borrowing.So how do you decide when debt is a smart move and when it might cause more harm than good?
Let’s break it down with practical insights and examples.
When to Avail Debt Financing
1. For Short-Term Working Capital
Example: A retail shop needs funds to buy inventory ahead of the festive season. A short-term loan bridges the gap and is repaid from sales.
2. When You Have a Clear Return on Investment
Example: Buying a new machine that increases output by 40%. If the revenue generated clearly exceeds the loan cost, it’s a good investment.
3. To Build Creditworthiness
Starting with a small loan and repaying on time helps establish a good credit record for future borrowing.
4. When Interest Rates Are Low
Lower borrowing costs mean more profit retained—especially for expansion or capital investment.
When to Avoid Debt Financing
1. Unstable Cash Flow
Example: A freelancer with irregular income taking a loan with fixed EMIs may struggle to repay during slow months.
2. Risky or Unproven Ventures
Example: Launching a new product in an untested market using borrowed funds is risky—you owe money even if the idea fails.
3. Already Over-leveraged
Taking on more debt when you’re already repaying multiple loans can strain cash flow and lead to defaults.
4. High Collateral Risk
If the loan requires pledging essential assets like your shop or home, think carefully—can you afford to lose them?
How to Use Debt Wisely
- Match loan type with purpose – long-term loans for assets, short-term for working capital.
- Check your cash flow – ensure you can handle repayments, even in a slow month.
Debt is not the enemy—it’s a tool. But like any tool, it can either build your business or break it. Smart borrowing starts with understanding your needs, your repayment capacity, and your long-term goals.
CA Ami Desai, Partner
.jpg)
.jpg)