Securing financing is a major challenge for small and medium-sized manufacturing startups in India. These startups are important to industrial growth but often struggle to access the capital needed to expand and modernize operations. In Q4 FY 2023, the average loan size for medium-sized MSMEs was over ₹9 million, reflecting the growing demand for a loan for manufacturing units.
For manufacturers, obtaining a loan for a manufacturing unit assists them in managing cash flow, investing in infrastructure, and upgrading equipment. Whether it’s for product launches, expanding production, or securing working capital, the right loan can fuel growth. However, selecting the right financing option is key to avoiding high-interest debt.
This article explores the steps to secure a business loan for your manufacturing unit, helping you evaluate your needs and make informed financial decisions.
Features of Business Loans for Manufacturing Startups
A comprehensive manufacturer loan offers the following key features and benefits:
- Long-Term Debt for Growth: Business loans offer long-term debt solutions for expansion, acquisitions, or share buybacks. By using collateral, manufacturers can secure capital for scaling without giving up equity or control.
- Access to New-Age Lenders: New-age lenders provide flexible credit options with quicker approvals and fewer requirements, making it easier for MSMEs to access funding for growth.
- Boosting Revenue and EBITDA with Debt: Manufacturing loans can be used to invest in technology, production, or market expansion, driving revenue and EBITDA growth, which justifies the cost of financing.
- Supporting Growth and Working Capital: These loans address both long-term growth and immediate working capital needs, helping businesses invest in inventory, machinery, or operations while maintaining liquidity.
Types of Business Loans for Manufacturing Startups and SMEs
Some prominent types of business loans include:
Term Loans
Term loans offer a lump sum amount, repaid in fixed installments over a set period. They’re ideal for long-term investments like machinery upgrades, facility expansion, or product launches, with fixed or variable interest rates.
Working Capital Loans
These short-term loans cover daily operational costs such as inventory, payroll, and utilities. Typically repaid within a year, they help businesses maintain liquidity without affecting long-term growth.
Equipment Financing
Equipment financing helps startups purchase or lease machinery, with the equipment acting as collateral. It’s perfect for businesses needing expensive equipment but lacking immediate cash flow.
Invoice Financing
This loan allows businesses to borrow against unpaid invoices, improving cash flow while waiting for payments. It’s especially useful for companies with long payment cycles.
Line of Credit
A line of credit offers flexible, revolving access to capital, ideal for short-term needs like raw materials or unexpected expenses. Interest is paid only on the amount drawn, making it a cost-effective option for variable needs.
Step-by-Step Guide to Securing Loan for Your Manufacturing Unit
Here’s a breakdown of the key steps:
- Assess Your Business Needs: Determine the exact amount of capital you need and how it will be used (working capital, equipment, expansion). A clear need helps you choose the right loan type.
- Evaluate Eligibility: Check your business’s eligibility, including credit score, financial health, and revenue. Lenders also consider growth potential, so ensure you meet their criteria.
- Prepare Financial Documents: Gather key documents such as your balance sheet, profit & loss statement, cash flow statement, and tax returns. Ensure they are up-to-date and accurate to speed up approval.
- Choose the Right Loan Type: Select a loan that fits your needs: term loans for long-term investments, working capital loans for short-term expenses, or equipment financing for machinery purchases.
- Submit the Application & Review the Offer: Apply with your chosen lender, ensuring all documents are complete. If approved, carefully review the loan terms—amount, interest rate, repayment schedule—before finalizing the deal.
Eligibility Criteria for Business Loans for Manufacturing Startups & SMEs
To qualify for a business loan for your manufacturing unit, you typically need to meet the following criteria:
- Operational Duration: At least one year in business, ensuring stability and a proven track record.
- Annual Revenue: Minimum revenue of INR 5 Crores for startups and INR 40 Crores for established businesses, reflecting solid financial performance and growth potential.
- Cash Runway: A minimum of three months of liquidity (for startups) and at least six months (for established businesses), demonstrating the ability to cover operational expenses and sustain growth.
- Financial Documentation: Startups must provide necessary financial statements or link business accounts for loan assessment and approval.
Wrapping Up
Securing the right debt capital is essential for MSMEs in the manufacturing sector to grow and stay competitive. Many businesses face challenges in managing working capital and expanding operations, making it crucial to access financing solutions that are tailored to their specific needs.
By exploring the various loan options available, manufacturing startups can make well-informed decisions that align with their cash flow, growth goals, and operational demands. Recur Club simplifies this process by offering quick and innovative funding options.
As India’s leading debt marketplace, Recur Club connects businesses with over 125+ marquee lenders, providing streamlined access to capital. With over ₹150 crores disbursed and 80+ manufacturing companies funded, this fintech platform is helping businesses unlock their potential and fuel their growth.
