Before the onset of covid-19 pandemic, small businesses across the globe were riding a success wave of retail sales in brick-and-mortar branches. Small businesses were taking tentative steps in the direction of digital marketing. Covid-19 induced national and global lockdown have disrupted the global supply chains of the businesses.

Many of the employees of small businesses have been temporarily or permanently laid off. The airline and cruise ship companies and other big organizations can get all the help they need from the central government because they are perceived to be too big to fail. Small business owners are presently a distressed lot because of the sudden jolt in their business model and there is unpredictability everywhere.

Cash flows are incredibly important in this difficult time for businesses to keep the shutters open and prevent them from filing bankruptcy. A recent report indicates that more than 60% of the small business owners are only able to pay for employee salaries and keep their businesses open for only another four months if the present economic depression continuous.

Nearly 97% of all businesses have been impacted directly or indirectly by the covid-19 pandemic. Some examples of small businesses that are disproportionately affected by the pandemic are the hospitality and restaurant sector.

In what ways small businesses are affected due to covid-19 pandemic?

More than 80% of small businesses in India have reported negative fallout due to the pandemic. Due to the decrease in demand levels from the global markets, there is a lot of unused inventory and mismatches in expenditure-income. Many of the government initiatives are not able to do full justice to the small business owners.

1. Market access

Due to the slowing down of the global economic engine, shopping needs have decreased, and this has obstructed the small businesses’ ability to dispose of their products in a quick and profitable manner.

2. Decrease in Productivity

Due to disruption in the crucial links of the global manufacturing and supply systems, the productivity of the small businesses has decreased, and cost factor of the raw materials has increased. The small businesses employ a lot of people with secured employment. Due to the deleterious economic changes in the business cycle, the employment benefits are being terminated which has a negative effect on their health outcomes.

Many of the small business employees have been fired from their employment and this has led to the fall of productivity. Small businesses are not able to keep all the employees on rolls due to the decreasing revenue incomes.

3. Decrease in credit off take

Even though the RBI has constituted measures which impose a 3-month long loan moratorium, there has been a negative inclination about the top management of banks and financial institutions which led to decrease in the credit into injected into the economy. Resultantly this has led to the disbursement of low quantum of loans in the pandemic period, thus exacerbating the depressive economic situation. The small businesses who were dependent on the credit flows was suddenly found to be short of crucial cash in a time when the businesses are supposed to be expanded.

4. Slow technology integration

Small businesses cannot generally expend a major part of their budget on integration of new technologies. The global pandemic has once again enunciated the importance of online avenues for sales of products and services.

• The digital marketing campaigns for small businesses have not yet reached the apex potential of large corporate companies.
• As a result, when lockdowns were initiated, the fall in sales and economic activity has devastated the brick-and-mortar small businesses.
• Digital marketing requirements are high in the present global markets, as it takes time to understand the full scope of the online shopping potential of the current business.
• It takes time to build a build a credible customer base online. In the future, small businesses have learnt the lesson of the past and have decided to take their stores online and create a robust website for fulfilling the demands of the customer online.

5. Presence of structural inequalities

In tune with the global trends, the small businesses in India have been the hardest hit in the economic cycle. The structural inequalities in the small businesses are increased due to the pandemic. Due to the absence of business scaling skills, the small business owners are finding it difficult to sustain the profitability of the business.  The government is taking initiatives and offering guidelines to banks and financial institutions to provide timely credit in the form of MSME loans to the eligible borrowers.

Small businesses loans are seen to kick start the economic activity in the various small businesses. The economy needs to be energized by increasing the quantum of business loan to entrepreneur and small businesses.

How small businesses can spring back from Covid-19 pandemic?

It is beyond doubt that covid-19 has created catastrophic circumstances on small businesses. As the word braces to reopen its economy, the small businesses must adopt a plan of action to account for losses and create a robust framework for future sustainability.

Let us go through the important steps through which small businesses can calibrate their operational strengths and bounce back:

Step 1: Design a plan of action

Having a plan is crucial in achieving the top position in business. The plan should address the vital questions:

• What does your present customer category require?
• How can your business take steps achieve high customer satisfaction?

The needs of the customer can be conveniently satisfied by identifying them first. Efforts must be taken by the small businesses to consistently provide reputed products and services and at the same time generating marketing campaigns for increased brand visibility. All the operational aspects of the business should be properly analysed and areas in which the business is no longer competitive should be identified and let go, so as to concentrate on the profitable avenues of the business.

• The creative aspects of the marketing department can be used to serve as a better connection between the product design and the end customers.
• Social distancing has become the norm in a post-covid economy. Make sure that you educate your customer on the importance of maintaining social distancing and the importance of personal hygiene.
• Small businesses can give free masks to every loyal customer and that would increase the trust level that in the business.

Step 2: Enhance virtual sale centres

Now is the time for small businesses to enter the digital marketing ecosystems. It is better late than never to introduce a robust digital marketing campaigns so that any future pandemics will never affect small businesses in a negative way. Alternative ways to market your products through the use of social media campaigns will be helpful in retaining brand loyalty and also pushing into new customer segments. Here are a few ideas:

Step-3: E-Commerce

Depending upon the product range of the small business, e-commerce integration into your operational capability will go a long way in decreasing the total cost of the company and enhance the profitability.

New customers can be netted by giving a virtual tour of the manufacturing process in your small businesses thereby showing your dedication. Customers will be happy if they are given no-contact payment options. In this way the quality of the customer experience is increased, and brand loyalty is introduced in the customer’s psyche.

 

MSME loans in time of covid-19

The government of India has responded positively to alleviate the widespread suffering to MSME business units. MSME sector forms a huge chunk of the India’s GDP with more than 30% of the contribution made by agriculture, food processing and other allied activities.

The lockdown has created a downturn in economic activity and the business operations of the MSME units are visibly hit. Revitalizing the MSME sector is the priority number one of all financial lenders.

A rising tide lifts all boats. Financial lenders have realised that by increasing the credit off take to MSME units can lead to good financial discipline among entrepreneurs.

Eligibility for MSME loan

• MSMEs should be holding a viable standard account with consistent cash inflows and outflows during the last two years.
• The maximum turnover of the MSM unit is limited to Rs 100 crores.
• The financial lenders do not ask for additional collateral during the restructuring and enhancement of the MSME loan portfolio.
• The outstanding that is presently on the account that is to be paid to the financial lender including interest should not exceed Rs 25 crores.
• The sanction loan amount enjoys a complete sovereign guarantee from the central government.

MSME Loan conditions

Rate of Interest	In the upwards of 7.65%
Amount of loan	From Rs 50 K onwards
Tenure of loan	Up to a maximum of 15 years
Processing fees	Depends on the discretion of the lender

 

MSME loan rates of different banks and financial lenders:

Allahabad Banks	Depends on the discretion of the bank
Oriental Bank of Commerce	10.75 %
Andhra Bank	13%
ICICI Bank	11.25%
Central Bank of India	9.75%
Indian Bank	7.65%
Punjab National Bank	8.85%

 

Features of the newly enhanced MSME loan

• The risk weight of the MSME loan is zero as the outstanding amount is fully guaranteed by the central government.
• Any new additional limits that are sanctioned after the completion of the restructuring process will be with no processing fees. In line with the RBI policy of loan moratorium, at 12 months period is offered where the periodical instalments are deferred which include principal repayment.
• The scheme application will be operational till the date of 31st November 2020 and no additional collateral is asked.
• Banks charge interest rate of 1 % above the base rate or marginal cost lending rate on the MSME. Non-banking financial lenders are expected to charge up to 14% interest rate depending upon the nature of the loan and the credit history of the borrower.
• MSME borrowers are required to take RBI approval before applying for a government guarantee. Financial institutions are given an additional charge over the assets and inventory stock that are already pledged by the borrower.
• The principle of exclusivity is removed for MSME borrowers that mean that borrowers can avail credit facilities from more than one lender.

Documentation required for restructuring of small business loans

1. For individual customers who are not salaried:

• KYC documents which include passport, PAN card, voter ID and unique identification number.
• The bank cash flow statements for the last 12 months before the covid-19 pandemic should be submitted.
• Certification of MSME to the manufacturing unit should be submitted.
• Any other document from NGO or a government institution which objectively evaluates the financial hardship caused by the covid-19 pandemic on the business unit should be submitted
• All GST returns on the business registration number should be submitted for the financial years of 2020 and 2021 till date.

2. In case of companies or business partnership

• 3rd party audit reports, tax audit report should be submitted.
• Comprehensive project financials that have projected cash inflows after restructuring should be submitted in case of a term loan
• All KYC documents of dealers and company directors should be submitted.
• The personal guarantee of promoters is required for any enhancement of small business loan to all limited companies.

 

FAQs

1. How can I apply for restructuring of my small business loan in aftermath of the covid-19 pandemic?

Borrowers are advised to send a request letter or email asking for a complete restructuring of their availed credit facilities from the financial institutions. The letter should carry the seat of the company along with all signatures of the company directors. The relevant support documents relating to cash flows and profit loss statements with third-party auditors’ signature should be submitted.

2. What are the options of restructuring available to small business loan borrowers in the during covid-19 pandemic?

Borrowers whose business finances are affected have the following options to pursue.

• Payment can be rescheduled up to a maximum time period of two years.
• A moratorium can be applied to the small business loan up to a time period of six months.

3. Can borrowers who have not exhausted their present working capital limits avail the MSME loan facility?

The covid-19 related small business loan credit is given in only emergency situations where the borrowers have completely exhausted the present working capital fund limit.

4. What is the frequency of submission of stock and inventory receivable statement?

The terms and conditions of the original loan are applied to this restructuring or the additional loan given to the borrower. Borrowers are required to submit their stock statements at as per the terms of the original loan statement.

5. Will deferment of EMI on small business loans lead to an increase of future EMI amount?

Deferment of the EMI will result in interest accruement on the principal amount and resultantly after 6 months after moratorium period, the total interest quantum will be increased. IT is recommended that those borrowers who have the liquidity to pay off the existing debt obligations to reduce the enhanced interest burden in the future.

6. Should borrowers make an application for a formal solicitation of MSME loan?

Small business loans under the covid-19 pandemic come are classified as pre-approved category. Banks offer all eligible borrows whose loan has not undergone restructuring during the last year of the Covid-19 pandemic, and also whose cash flow statements are in order. Borrowers who do not want to avail this facility should select the ‘opt-out’ option in the email that is forwarded to them.

7. Will there be any processing fee be charged on the additional loan amount given to small businesses as a pandemic relief?

Small business loans are given under the guidelines of the government schemes. RBI rules mandate that no processing fees should be charged. In tune with the RBI mandate, the finance ministry has issued government guidelines to financial lenders that they are not supposed to charge processing fees. The Supreme Court also ruled that financial lenders should not charge any prepayment penalties during the loan moratorium period.

8. Can small business loans be provided to entrepreneurs for start-ups during covid-19?

Yes, it’s definitely possible. Financial lenders are encouraging entrepreneurs to apply for small business loans. The loan quantum eligibility can be found out using the EMI calculator on the websites of reputed financial lenders.

9. How do financial lenders calculate interest on small business loan?

A diverse range of factors are incorporated in calculation of business loan interest rate. Some of them include income of the borrower, business health projections and most importantly the credit history of the borrower.

10. Is credit history of the borrower considered during loan sanctioning?

A credit score of 700 plus is seen as an ideal score for favourable terms of the loan. However, in case of small loan borrowers, the credit score is a new concept in India. Therefore, a chance is given to borrowers to build up their credit score in tune with the international financial standards.