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.
Since many lenders including banks and non-banking financing companies (NBFCs) offer small business loans to their customers, it is easy for companies to receive financial aid for their business needs using this scheme. With multiple online EMI calculators available, borrowers can also plan their loans better beforehand so as to avoid loan rejections and manage their finances better. Additionally, most of the banks and NBFCs offering this kind of a loan provide online applications to allow their customers to keep a track of their loans after the amount is disbursed. Borrowers can remotely check details such as interest certificate, payment schedule, repayment history, etc. through these applications.
When an entrepreneur opts for this financing plan to fund his or her business venture, he/she has the option to repay the loan using a repayment method that is convenient to him/her. Since lenders understand the difficulties and underlying complexities involved in running a business, they might devise a personalised repayment plan before sanctioning the loan. This not only helps the borrower manage the business cash flow better, but also make timely loan repayments. Under this scheme, customers can also choose to increase/reduce the EMI amount or opt for the bullet payment method as per the financial condition of the business.
Due to minimal documentation and simple application process, this scheme is preferred by many entrepreneurs to fund their business requirements. Many banks and NBFCs provide online application method to the borrowers so that they can easily apply for this scheme without having to step out of their houses.
When a businessman applies for a loan under this scheme looking to start a new venture or expand his or her current company, he/she can be assured that the funds will be quickly disbursed to his/her account. Owing to the fast loan application and approval process, borrowers can get access to quick funds when applying for a small business loan.
Whether you are planning to start a new business or looking to expand/upgrade your current one, you will have the flexibility to opt from a wide range of customised solutions to suit your specific business need. This will help you choose a plan that suits the fund requirements of your unique business.
The interest rate of small business loans depends on various factors such as the loan tenure, market dynamics, the credentials of the applicant, the financial condition of the business, etc. Most government-backed financing schemes offered by banks and NBFCs offer loans at low interest rates to help business owners repay their debts on time, thereby, reducing the chances of a bad loan. Usually, these loans also have nominal processing fees and other one-time charges with no hidden fees.
Since a healthy amount of cash flow is required to keep a business running, these loans are a great way to gain access to funds in order to gain a competitive edge while increasing the amount of revenue generated. The funds from this loan can be used to start a new business branch, launch a marketing campaign, or upgrade an inventory to deal with the sudden demands of a seasonal business. Then, the profit earned from these routes can be used to repay the debt and for further reinvestment. Furthermore, most of the lenders do not specify how the funds should be invested. Therefore, the business owners have the complete flexibility to use it as per their business requirements.
Under the Income Tax Act, 1961, small business loans also offer tax benefits to the borrowers. Therefore, the interest paid on such small business loans are eligible for tax deductions.
Many banks offer small business loans to their customers without any collateral. Therefore, availing such loans means there are less chances of businesses losing their assets in case they default during the repayment of their loans. In such cases, the business is assessed based on its expected receivables and cash flow. Before applying for this loan, it is advisable that the entrepreneur consults the lender regarding the requirement for collateral to avoid any future conundrum.
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:
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