When is the Right Time for MSMEs to Get into Debt?

In doing business, capital is certainly a basic thing that is needed by every business actor, including: MSMEs (micro small and Medium Enterprises). Especially, when they are just starting or growing a business. Without sufficient business capital, the business cannot run optimally.

Moreover, the government is currently aggressively encouraging MSME players to continue to advance to class. The government makes it easy for MSME actors to get Startup Capital sufficient. One of them, by collaborating with banks and platforms financial technology or fintech.

Debt for SMEs, Profit or Loss?

The government's reason is to encourage the collaboration of MSME actors with banks and fintech through debt or capital loans, in order to accelerate the national economic recovery. However, will this method have an impact on profits for MSME actors, or is it the other way around?

Reynold Wijaya, Co-Founder & CEO fintech P2P lendingmy capital, shared his views on this matter to Trikinet.com. According to him, debt is often considered something that should not be done. Debt is often seen as a shortcut when experiencing financial difficulties.

“In fact, not all debt is bad. Productive debt or debt that is used properly can be a positive thing. Borrowing for business needs is included in the productive category," he explained.

Debt or loans can be a help for businesses to grow. Debt is needed to run the business operations and buy the assets needed in the business. However, if not managed properly, debt will only become a burden.

Things You Need to Know Before Debt

Therefore, it is important for MSME actors to pay attention to things that need to be known before applying for debt or capital loans.

• First, understand the purpose of applying for debt. Make sure the debt is in accordance with business needs. Avoid interfering with the owner's personal needs.
• Second, do good financial management with detailed calculations. Make sure funds are allocated for productive things for the business being run.

"MSME players can start monitoring their financial planning before making a loan by checking cash flow, monitoring asset growth, and debt ratios," said Reynold.

Where Can MSME Actors Get Debt?

Meanwhile, MSME actors can apply for loans to financial institutions such as banks or fintech companies, already registered with OJK (Financial Services Authority).

Fintech companies currently exist to be the choice of MSME actors in debt. The reason is because the proposed funds are disbursed quickly, and the requirements requested are relatively simple.

“Each financial institution has different terms and conditions. At Modalku, the borrower's criteria are different for each product. However, in general, the borrower's business has been running for at least six months,” said Reynold.

It should be noted, if you intend to apply for a loan to a fintech, make sure the company makes a logical offer, especially in terms of loan interest.

Need to get into debt now?

Before getting into debt, MSME actors also need to determine the right time to apply for a loan. So, when is the right time to borrow?

• Debt When Net Credit Score

According to Reynolds, for MSME players, the right time to apply for a loan is when the credit score is clean. When the credit score is good, the chances of the loan being approved will also be greater.

• When You Want to Do Business Expansion

During business expansion, loan funds can be used as capital to cover various expenses during the expansion process. To note, business expansion itself is an effort to expand business networks, in order to increase profits.

• When Efforts Experience Setbacks

Debt can also be a way out for MSME actors when their business experiences a setback. Borrowed funds, at least, can save the business from the risk of bankruptcy.

If you are sure, determine how long the tenor is needed to pay off the loan taken. Thus, loan funds can be used optimally, and avoid the potential for default.

How to Manage Capital from debt?

• Allocate Funds according to Purpose

When debt funds or capital loans have been liquidated, the first thing that needs to be done is to allocate funds according to the initial purpose. Be it business expansion or rescuing a declining business.

If the goal is business expansion, it can be used to open new branches, increase the number of employees, and improve production quality.

Meanwhile, if the goal is to save the business, it can be used to intensify promotions, create new innovations in products, purchase raw materials, and improve services.

• Create Priority Scale

After the loan funds are disbursed, MSME actors can also make a priority scale for funds. Thus, knowing which needs must be met first.

"Make sure the loan obtained is used for productive needs so that the circulation of money becomes clear," explained Reynold.

• Avoid Intervening Personal Needs

Next, make sure the debt or capital loan is not used for personal purposes.

• Monthly Installment Commitment

Most importantly, set aside business profits to pay off debt or loan installments until they are paid off.

Ideal Debt Amount for MSMEs

Reynold emphasized that in making loans, MSME actors must prioritize paying debts. Also, when taking a loan, make sure the funds borrowed are sufficient as needed.

"Then MSME actors must also consider the amount of debt in accordance with financial conditions and needs so that they have projections to be able to pay off the debt," he continued.

This is to avoid the higher interest rates. This is because the amount of debt affects your credit score or creditworthiness. If MSME actors have a large debt value, the interest rate charged will be higher.

So, what is the amount of debt that is still categorized as healthy for MSMEs?

According to Reynold, the maximum limit for loans for MSMEs is ideally recommended at 30% to 40% of their income. The goal, so as not to interfere with finances.

Tips to Avoid Bad Credit

In the middle of the installment period, there are often problems experienced by the borrower. One of them bad credit. Bad credit is a condition where the borrower struggles to the point of not being able to pay the debt. Starting from dismissals, delays and requests for an extension of the installment period.

Reynold said this condition could occur due to uncertain conditions. For example, the crisis experienced during the Covid-19 pandemic. This condition had caused MSMEs to experience a decline in turnover. Thus, it is difficult to repay the loan funds.

There are also some tips to avoid bad credit, including:

• From the side of MSMEs as borrowers

Perform good financial management, by applying the steps for managing capital from debt, as described previously.

“MSMEs are advised to apply for loans according to their needs and financial capabilities. Also, it is expected to be able to repay the loan within the allotted time,” said Reynold.

• From the Lender's Side

Apart from the borrower's side, lenders also need to have a strategy, in order to anticipate the occurrence of bad loans.

First, by applying the principle responsible lending, where the borrower provides loans according to the ability and financial condition of the borrower. Before determining this, the lender may assessment or assessment of the borrower.

"Assessment done thoroughly when applying for a loan, to ensure the borrower has the ability to repay the loan. After MSMEs get loans, there are monitoring routinely." closed Reynolds.

Those are a series of guidelines related to how to manage capital from debt for MSME actors. Make sure you know these things, before applying for a loan. If your knowledge of this matter is mature, the risk of problems when you get into debt is getting smaller.

Video: The Story of Successful MSMEs in Managing Capital from Debt.

https://www.youtube.com/watch?v=soAodDvg0U8&t=8s