How to Prepare Your MSME for Funding: A Step-by-Step Guide

India’s small and medium businesses, also known as MSMEs, play a very important role in the country’s economy because they create jobs, support local communities, and help the economy grow. Even though they work hard and have strong potential, many MSMEs struggle to get funding from banks or financial institutions. This could be due to missing documents, a lack of formal records, or not knowing how to apply for a loan. If you are planning to expand your business, buy new equipment, or improve your daily operations, funding can help you move forward with confidence. But before applying for a loan, it is important to be fully prepared. 

Here, we will discuss MSME funding preparation, which includes everything from getting your documents in order to choosing the right loan type. You’ll also learn how digital platforms like TallyCapital can make the process faster and easier.

What does funding mean for MSMEs?

Funding means getting money from a bank, financial institution, or digital lender to support business needs. For MSMEs in India, funding can be used for many purposes, like buying raw materials, expanding operations, hiring staff, upgrading equipment, or simply managing day-to-day expenses.

There are different funding options available for MSMEs, including working capital loans, term loans, government-backed schemes, and even funding through fintech platforms. Each option has its benefits, interest rates, and repayment terms.

For any MSME, having access to the right kind of funding at the right time is important. It helps your business grow steadily and handle challenges without financial pressure. However, to get that support, you need to be ready with proper records, clear plans, and formal processes.

Step-by-step process to prepare your MSME for funding

Now that you understand what funding means and why it matters, let’s look at how you can get your business ready. Each step below will help you build a strong foundation so that lenders trust your business and are more likely to approve your loan.

Step 1: Understanding the government support available

The Indian government has introduced several schemes to make it easier for MSMEs to get funding. Before applying for a loan, it’s important to know which schemes you qualify for and how they can benefit your business.

• Udyam registration: This is the first step for any MSME. It helps you become a recognised business and gives you access to various benefits like lower interest rates, easier loan approvals, and government subsidies.
• CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises): This scheme provides collateral-free loans to eligible MSMEs. It offers a credit guarantee cover of up to ₹5 crore, reducing the risk for lenders. This means you can apply for a loan even if you don’t have property or assets to offer as security. Many banks and NBFCs offer loans under this scheme, making it a useful option for small businesses.
• MUDRA loans: These loans are designed for micro and small enterprises engaged in manufacturing, trading, or service activities. Based on the size and stage of your business, you can apply under three categories: Shishu (up to ₹50,000), Kishor (₹50,001 to ₹5 lakh), and Tarun (₹5 lakh to ₹10 lakh). MUDRA loans come with simple eligibility criteria and no collateral requirement.
• Stand-up India scheme: This scheme supports SC/ST and women entrepreneurs. It provides bank loans between ₹10 lakh and ₹1 crore for setting up a new enterprise in manufacturing, services, or trading. 

Knowing about these schemes and how they work can help you choose the right one and increase your chances of getting approved for a loan.

Step 2: Keeping your financial records updated and accurate

To improve your chances of getting funding, your business must show that it is financially healthy. Lenders carefully review your financial records to understand how well your business is performing and whether it can repay the loan on time.

To make sure your records are in good shape, focus on the following:

• Use accounting software: Tools like TallyPrime make it easier to record daily transactions, track expenses, manage GST filings, and generate reports such as profit and loss statements, balance sheets, and cash flow summaries. These reports are often required by banks during the loan application process.
• File tax returns regularly: Make sure your income tax returns (ITR) and GST returns are filed on time. Lenders treat regular tax filing as a sign of a stable and responsible business.
• Avoid errors and mismatches: Incorrect or missing information in your financial data can lead to delays or even rejection. Check your records for accuracy before submitting them to any lender.

Strong and well-maintained financial records build trust with banks and financial institutions and show that you run your business professionally.

Step 3: Preparing a clear business plan

A well-written business plan helps lenders understand your business goals and how you plan to use the funds. It shows that you have a strong vision and a practical approach to growth, which builds confidence among lenders.

Here’s what your business plan should include:

• Business overview: Explain what your business does, who your customers are, and what makes your product or service unique.
• Purpose of the loan: Clearly state why you need the funds, whether it’s to buy equipment, increase inventory, hire staff, or expand operations.
• Revenue model: Show how your business earns money. Include past sales data and future revenue projections to show that your business can repay the loan.
• Repayment plan: Mention how you plan to repay the loan, monthly income, expected profits, or cost savings from the investment.
• Growth potential: Highlight how the funding will help your business grow in terms of scale, market reach, or profitability.

Step 4: Knowing your funding options

Apart from the government support available, you can also explore business loan options. Not all loans are the same. Choosing the right type of funding depends on your business needs, how much money you need, and how soon you can repay it. Understanding your options will help you make better financial decisions and avoid unnecessary debt.

Here are some common funding options for MSMEs in India:

• Working capital loans: These loans help manage daily business expenses such as salaries, rent, and utility bills. They are short-term loans meant to keep your operations running smoothly.
• Term loans: If you need funds for a larger investment like buying machinery or setting up a new unit, term loans are a good option. They usually have fixed interest rates and repayment schedules.
• Overdraft facility: Banks may allow you to withdraw more than your account balance up to a limit. This is useful for short-term cash flow gaps and is usually linked to your business income.
• Digital lending platforms: Fintech companies and platforms like TallyCapital offer quicker approvals and minimal paperwork, helping businesses apply for MSME loans without any hassle.

Step 5: Checking your credit profile

Your credit score plays a key role in getting a loan. Lenders use it to check your past repayment behaviour and financial discipline. A strong credit profile increases your chances of getting approved and may even help you get better interest rates.

Here’s what to keep in mind:

• Check your credit score regularly: A score above 700 is generally considered good for business loans.
• Clear any outstanding dues: Repay old loans, credit card bills, or pending EMIs. Any delay or default can negatively impact your score.
• Avoid multiple loan applications: Applying for several loans at once may reduce your score, as it shows credit hunger. Apply only when you’re ready and confident.
• Build a credit history: If your business is new and has no credit history, consider starting with a small loan or a business credit card and repay it on time to build trust with lenders.

Step 6: Organising all required documents

When applying for a loan, submitting the correct documents is just as important as having a strong business plan. Proper documentation speeds up the approval process and reduces the chances of rejection.

Make sure you have the following:

• Business registration proof: Udyam Registration Certificate, GST registration, or other relevant business licences.
• KYC documents: PAN card, Aadhaar card, and address proof of the business owner or partners.
• Bank statements: At least 6–12 months of business bank account statements to show income and expenses.
• Financial statements: Profit and loss statement, balance sheet, and cash flow statement, preferably prepared using accounting software like TallyPrime.
• Tax returns: Latest income tax returns and GST returns filed for the business.
• Loan-specific documents: Some lenders may ask for additional documents like project reports, sales invoices, or quotations, depending on the loan type.

Step 7: Choosing the right lending partner

Selecting the right lender is just as important as preparing your documents. Different lenders offer different terms, interest rates, and approval processes. Choosing the one that matches your business needs can make the funding process smoother and more beneficial.

Here’s how to make the right choice:

• Compare loan offers: Look at interest rates, processing fees, repayment terms, and eligibility criteria from different banks, NBFCs, and digital lenders.
• Check the lender’s credibility: Always go with trusted financial institutions or RBI-approved NBFCs and fintech platforms.
• Understand the process: Choose lenders that offer simple and quick application processes, especially if you need funds urgently.
• Look for MSME-friendly platforms: Platforms like TallyCapital are designed especially for small businesses. They understand MSME needs, use your digital data (like Tally reports), and offer faster approvals with minimal paperwork.

Conclusion

Getting funding for your MSME is all about showing that your business is ready to grow. When you keep your records clean, understand your options, and choose the right lender, you increase your chances of getting approved.

If you’re looking for a trusted partner, check out TallyCapital. It connects small businesses like yours with lenders who offer quick approvals, simple steps, and less paperwork. Supported by the trusted name of Tally, it makes getting a loan easier and faster.

You can also explore the TallyCapital Blog for helpful tips, government scheme updates, and expert advice to guide your funding journey.