Healthy Debt Tips for MSME Actors

Every business actor, including MSMEs or micro, small and medium enterprises, definitely need sufficient capital to run their business. Business capital, later, can be used to meet business needs.

In the midst of the desire of business actors to obtain sufficient capital, they are often faced with various kinds of limitations. Like, not having sufficient funding sources for capital.

However, in this digital era, business actors have easy access. Namely, there are wide opportunities for capital loans online from financial institutions, such as banks and platforms financial technology or fintech peer-to-peer lending.

Debt as a Solution to Lack of Funds?

Chief Finance Officer (CFO) fintech Amartha, Ramdhan Anggakaradibrata assessed, the wide opportunity to get a capital loan or borrow at this time, can support MSME actors to enlarge their business scale.

"Debt can help MSMEs expand, for example adding workers, opening new business branches, expanding markets, developing products, or buying new technology that supports business productivity," explained Ramdhan.

According to him, although debt is often seen as something that should not be done, it is actually a good thing. As long as the use is right, that is, in accordance with the needs and abilities of MSME actors as borrowers.

"If the debt is healthy, debt can be one of the instruments that can enlarge the business scale of MSME actors. So his nature is actually good,” said Ramdhan.

What Does Healthy Debt Look Like?

Healthy debt is debt that arises for productive needs, which can generate financial benefits or have a positive impact on the business.

In addition, consumer debt in the form of assets, with a benefit value that is longer than the repayment period, can also be categorized as healthy debt.

There is also the amount of debt that is categorized as healthy and ideal, which is in accordance with financial conditions and needs, so that the borrower has a projection to be able to pay off the debt.

“For MSMEs, the ideal maximum amount is 50% of total assets, or installments of 30% of total income. For example, if the assets are 100 million (in the form of a shop booth offline or booth), then the maximum debt that can be lent is 50 million rupiah," said Ramdhan.

In addition to assets, you can also use business income. For example, a shop online If you have an income of 10 million per month, the debt that can be borrowed has a maximum installment of 3 million rupiah per month.

Healthy Debt Criteria for MSMEs

According to Ramdhan, when deciding to take a capital loan with debt, it is better to make the best possible plan. He also explained the criteria for healthy debt for MSME actors, including:

• Used for productive activities not consumptive.
• The value of the debt taken is according to the business needs and the ability to pay the borrower.
• Its use has been planned specifically and systematically.
• An estimate of the return has been made, especially in terms of cash flow

Tips for Managing Capital from the Right Debt

Ramdhan said debt must be managed in a disciplined manner to get maximum results. He also shared a series of tips for managing healthy debt for MSME actors, including:

• Maintain neat and disciplined financial records. Record all business expenses and income every day, then group them according to a certain period.
• Separate business cash flow and personal cash flow belonging to business actors. Keep in mind, personal needs are not good if they interfere with business needs.
• Make sure the use of debt follows the business plan. Also, it should not be used for consumptive purposes.
• Monitor targets. Make sure the borrowed debt can help the business in achieving the target or
• Make sure the business actor really needs the debt and is able to pay it. It can't be just one of them.

Capital management originating from debt, if carried out in the ways as above, will prevent the business from being far away and trapped in debt problems.

How to Avoid Debt Problems

In the midst of the debt repayment period, there are often problems experienced by business actors as borrowers. For example, bad credit. Where business conditions are experiencing difficulties, to the point of not being able to pay debts.

Finally, there were absenteeism, delays and requests for an extension of the installment period. Problems like this, according to Reynald, can be avoided if:

• Business actors separate business and personal cash flows. Thus, the finances are not mixed and have the potential to be used for consumptive needs.
• Make a careful plan before borrowing money. Then, when the loan funds are liquid, use them according to the target.
• Take into account the ability to pay the loan so that you do not have the potential to default.
• Read the capital loan contract carefully. So, when there are loan clauses that are burdensome and not understood, they can be dug deeper or ask the loan lender again.
• Find out first background For example, by ensuring that the company is registered with the OJK (Financial Services Authority). Thus, avoiding the potential for fraud and extortion.

How to Overcome Debt Problems Experienced

When business actors as borrowers are already experiencing debt problems, instead of applying for loans elsewhere, to cover their previous debts. The right solution is to communicate the current state of the business with the lender.

Then, the lender can apply for debt restructuring. Debt restructuring is a relief given to business actors as borrowers, in order to improve their financial condition, when entering the default phase.

“MSME actors can choose whichever approach is most appropriate to their ability to pay at that time, with the aim of still being able to pay off these obligations. By submitting new terms and conditions that are agreed by both parties," explained Ramdhan.

Restructuring that can be done, among others: by extending the loan tenor, applying for interest relief, pledging some assets to a credible institution, changing business strategy, and other adjustments that can help alleviate debt.

Have a Bad Financial History, What's the Solution?

When a business actor as a borrower has entered a default phase at a financial institution providing loan funds, be it at a bank or fintech. Then, wanting to reapply the debt, often the consideration is greater, because it has a bad track record.

The solution to this problem so that the loan application can be accepted is, first of all, make sure the business conditions have improved. Then, make sure that the debt you have is not in the risky category.

"It would be better if the business actor as a borrower had paid off the past debt in its entirety," suggested Ramdhan.

If this has been done, MSME actors can provide a letter of clarification to the OJK or the Bank. Explain that the previous debt payments have been completed in full.

"Relevant business actors can also explain what is the main cause of the debt experiencing problems, for example due to the effects of the pandemic or other things," said Ramdhan.

Order Condition MSMEs Trusted By Financial Institutions

Every financial institution, be it a bank or fintech, has its own criteria of consideration in giving confidence to business actors as borrowers. Ramdhan said that his party also had special considerations.

"Amartha's financing product is a group loan model, so in addition to the personal assessment of prospective borrowers, group assessments also need to be carried out to maintain the quality of the loan," said Ramdhan.

Ramdhan also explained the factors that were taken into consideration, so that MSMEs as borrowers could be trusted to owe their debts, including:

• Have a business that is already running and the business is engaged in a low-risk sector, such as trade, services and others.
• Forming assemblies of associations with other fellow borrowers, and are willing to undergo a joint responsibility system.
• Have good faith and have been approved by their legal guardian/spouse (father/husband).
• Doesn't have a bad track record in his community.
• Can accept a weekly payment system, which will be repaid within 50 weeks.
• Willing to attend weekly meetings and discipline to follow the rules of the lender.