Multiple banks. Different interest rates. Call it a "conflict of interest".
Multiple banks. Different interest rates. Call it a "conflict of interest".
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    Small Business Loans

    What are small business loans?

    Unlike lending to individual consumers, small-business lending is, by and large, considered comparatively complex in addition to being more competitive.

    Small business loans, offered to small business units to enable them to efficiently and successfully run their units, are also characterised by various incentives aimed at reducing their expenditure.

    Several lenders provide secured loans with tenures ranging from three to five years to small business units catering to various business requirements such as working capital requirement, purchase of state-of-art industrial equipment, expansion of business units, start-ups, upgradation of technology and establishment of new buildings among many others. Some financial institutions may offer various products such as overdraft facilities for the benefit of customers.

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    Small-business loans took a beating post the 2008 financial crisis with several major banks staying away from doling out loans. However, subsequently, the small-business loans market has seen an upswing with several financial services firms and institutions providing loans. According to market experts, small business loans for start ups have a high risk factor. Nevertheless, small business establishments can acquire loans provided certain requirements are in place such as robust equity to sustain the business operations, working capital and timely and efficient resource management among many others. The lender after reviewing cash flow projections and financial statements gauges your ability to repay loans in the long-term.

    Things to do before applying for small business loans

    The borrower has to consider all costs associated with setting up a new unit such as product inventory, manufacturing equipment and raw materials. Other costs include establishing legal structure and trademarks in addition to several administrative costs such as business insurance, postage, product packaging, utilities and rent. In this day and age, one has to also consider costs associated with computer hardware and software, maintenance and internet access among others.

    Different banks have different requirements to provide small business loans with the exception of some some basic documentation.

    • Some of the financial documents requested by most banks include financial statements of the past two or three years, balance sheets, income statements in addition to the current financial statements.
    • Also, one has to maintain records of accounts payable and accounts receivable among others.
    • Companies should review their business profiles, analyze their credit requirement and work on a blueprint on how to payback their loans.
    • The lender may ask the borrower to not only submit a profile of the company in terms of its size and products but also profiles of owners or members of the management.
    • The borrowers may enquire about the kind of industry the business unit caters to, product(s) or service(s) offered, annual sales, growth estimates, headcount in terms of the total number of employees in the business unit, the estimated volume of customers, account keeping, and delivery mechanisms among many others.
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    Eligibility criteria for small business loans

    The following is the broad eligibility criteria for availing of small business loans in India. The main requirements for acquiring small business loans are the following:

    • Credit history: Borrowers should be aware of their credit report to ensure that it’s up-to-date and accurate. Having a sound credit history is of paramount importance to ensure that lending institutions are favourable to providing finance for your business unit. Financial institutions review your credit report before reviewing and subsequently approving or rejecting your loan application.
    • Business feasibility: You have to make profit and loss projections for up to a year in some cases. One has to follow industry standards while projecting your profits and losses. If you don't follow industry standards, or you don't know what those standards are, try to make explicit any assumptions you are factoring into your projection. Borrowers have to prepare detailed pro-forma statements which has to include projections to help lenders gauge the feasibility of the project or unit in the near future.
    • Business plan: One of the key determinants which will play a key role in acquiring a small business loan is a robust business plan. The lender needs to be convinced that the business proposition is sound in terms of financial viability. The lending institution must be satisfied with the overall plan layout including capital estimates for start-ups, operations outflow in terms of employees and marketing, assets in terms of infrastructure and equipment and the capacity to pay off debts.

    Features of small business loans

    Small business loans can be either backed by assets in that some assets are offered as collaterals, based on which a loan is sanctioned typically with comparatively low interest rates. Small business loans can also be backed by cash flow in that loans are provided depending on revenue streams, business model and balance sheets and at comparatively higher rates. Several public sector banks such as the State Bank of India, Bank of Baroda, Punjab National Bank and private banks namely ICICI, HDFC and Axis among others offer small business loans to gain a foothold into the rural and semi-urban markets.

    While the aforementioned banks have the incredible opportunity to tap into hitherto untouched or virgin territories and gain access to an under-banked population, they also face several challenges in that there are various risks involved such as non performing assets, inadequate capital and even low profitability among many others. According to a recent government report, 5.8% of small business units in the country receive finance by finance institutions, 2.05% get funding by non-institutional streams while 92.77% are self-funded.

    Small business loans from banks

    Most banks offer loans to small businesses if they get clear profit estimates, failing which, it may prove to be an uphill task for investors to acquire a loan. Several banks in India offer business loans of various types and categories for the benefit of customers. For instance, IDBI Bank provides finance to MSMEs including a wide array of products and services such as listed below.

    • Vendor Finance: Offers working capital and bills discounting facility.
    • Collateral Free Loans: Credit for up to Rs. 1 crore sans collaterals.
    • Sulabh Vyapar Loan: Loans to traders at attractive rates.
    • Dealer Finance: To provide Liquidity to the distribution chain partners.
    • Medical practitioners: Finance to doctors for establishing clinic or buying equipments.
    • Laghu Udhyami Credit Cards: Finance to small retail traders, artisans and MSE units.
    • Professionals & Self-employed: Scheme for professionals and self-employed.
    • Credit card receivables: Offering finance against payments through credit/debit cards.
    • Loan against property: Finance against property for business needs.
    • SME Smart Line of Credit: Finance via pre-approved credit limits.
    • Small Road & Water Transport Operators: Helps transport operators get vehicles.

    Some other examples of banks offering finance to small business units include ICICI Bank which offers ‘office equipment loans' (Rs. 30,000) for a period of 12 to 36 months on the basis of collateral provided. GE Money India provides personal loans to small business units at at 16 per cent. Also, Fullerton India offers vyapaar scheme for the self-employed and small business units with a turnover of less than a Rs. 2.5 crore. Citibank provides loans up to Rs. 25 lakh sans collaterals in addition to unsecured overdraft for around Rs. 2 crores. Intriguingly, interest is charged only on the loan amount used by the borrower. Oriental Bank of Commerce provides loans for up to Rs. 25 lakh sans collaterals depending on the proven track record of the borrower.

    Small business loans in India

    Banks in India are increasingly tweaking their lending models to make them flexible to provide more loans to small business units. Bankers are also considering ‘credit surrogates' to increase lending to small business units.

    Intriguingly, several banks in the country have 'pre-approved loans' to facilitate greater ease of transactions. What’s more, loans are also being provided against stocks and mutual funds among many other assets. Several banks are offering products to suit specific requirements of a profession. For example, ICICI and HDFC provide loans to transporters. Likewise, several banks have created products to offer loans for pharmaceuticals, gems, construction and tourism among others. Several leading banks are acknowledging that there is a huge market to be tapped in the unorganised sector in tier-II cities, towns and rural areas such as shopkeepers, traders and commission agents (who typically look for EMI-based personal loans sans collaterals), to name a few.

    According to conservative estimates, small business units in the country offer employment to over 106 million. Also, a small percentage of over 57 million small business units across India are supported by institutional finance, leaving the rest to fall prey to private lenders. The government, therefore, has mooted several measures to come to the rescue of small business units. The central government set up the National Manufacturing Competitiveness Council to boost the manufacturing sector. The Reserve Bank of India (RBI) also plans to issue some guidelines to banks to offer more small business loans including reducing interest rates. Banks have been asked to register a 20 per cent year-on-year growth in terms of offering credit to small enterprises.

    What’s more, the current central government has instituted a separate ministry for SMEs (MSME). The government also announced India Opportunity Fund running over 800 million USD (via SIDBI) to help small business units. The National Small Industries Corporation Limited (NSIC) facilitates distribution of products and raise awareness of technology in small units. It is common knowledge that the National Bank for Agriculture and Rural Development (NABARD) provides credit facilities to cottage industries. Also, the World Association for Small and Medium Enterprises (WASME) India chapter supports small business units.

    Types of small business loans in India

    The MUDRA (Micro Units Development and Refinance Agency Ltd) Yojana launched this year offers loans for up to Rs. 10 lakh at low interest rates. MUDRA will cater to over 5 crore self-employed persons. The Pradhan Mantri Mudra Yojana, which currently has around Rs. 20,000 crore at its disposal, would be a subsidiary of SIDBI.

    Some of the different kinds of business loans offered in India are the following:

    • Government: As mentioned above, government has mooted special schemes to boost the capacity of small business units across the country. Loans are provided to the elderly, minorities, factory equipment or office expenditures among many others.
    • Micro loans: The maximum repayment term is six years. Micro loans are offered provided there is a robust business plan and a profitable venture.
    • Business organizations: Large business conglomerates can offer finance assistance to small business units provided the latter show potential for growth and are lucrative in terms turnover to repay the loan amount. Some examples include franchise loans and export financing. Documents required include a sound business plan, financial status report, credit ratings and cash flow projections among many others.
    • Personal loans: Several banks offer personal loans anywhere from Rs. 10 to 25 lakh which are typically unsecured at 18 to 24%. The loans are repaid through instalments.
    • Professional loans: These are unsecured loans provided to self-employed professionals such as chartered accountants, company secretary, doctors and so forth. It does not encompass manufacturing and processing units. The loan amount varies from Rs. 25,000 to Rs. 25 lakh depending on the financial status of the applicant, loan tenure and repayment capacity at a rate of interest which depends on the prime lending rate.
    • Project Finance: Provided for new long-term infrastructure or industrial projects with flexible repayment terms on the basis of the project assessment report.
    • Equipment Finance: Provided to buy new equipment or lease equipment for business units.
    • Working Capital Loans: Provided for daily business needs for smooth functioning of the units.
    • Bill discounting: Provided to ensure that your unit discounts bills before the maturity date.
    • Lease rental: Provides term loan against lease contracts to facilitate business requirements.
    • Financial advisory: Provided for assistance by financial experts.
    • Insurance: Provides finance for insurance solutions for better safety.
    • Trade loans: Provided to traders for starting a new business enterprise or expand the current business unit. The loan is repaid through Equated Monthly Installments or EMIs. The rate of interest is based on the prime lending rate (fixed and fluctuating). Some banks ask customers to submit collaterals such as land. National Savings Certificates, life insurance policies in addition to shares and bonds among others are also accepted against which loans could be provided.
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