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.
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.
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.
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:
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.
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.
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.
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.
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: