The Advent Of Quick And Easy Business Loans

Aug 17, 2016 11:15 IST 1245 views

A few years ago there was a void in the Indian economy. Banks were not comfortable lending money to small enterprises as they perceived it to be quite risky. Instead, they provided financing to formal, medium-sized enterprises that were less of a risk. Over time, a number of Non-Banking Financial Companies (NBFCs) were set up, and as they were a bit more local, they helped provide financing to smaller companies, and filled the credit void. The closing of the credit gap has led to the fast growth of India's Micro, Small and Medium Enterprise (MSME) sector. To a large extent, the fast growth of the sector can be attributed to the various government policies being put in place to provide these enterprises with credit, and safeguard their interests. Today, these initiatives have made it easier for MSME owners to procure financing for their companies.

Am I Eligible for a Loan?

As an entrepreneur, securing finances for your start up is important. With the right amount of finances, you can arrange for whatever equipment and personnel you require to boost your business right from the start. However, sometimes it's a little difficult to understand who exactly can apply for a small business loan, and what purposes the money can be used for.

Here's a short guide that will help you understand whether you're eligible for a loan or not, and will also give you insight into what kind of expenses the money can be used for:

  1. Start Ups: Both banks and NBFCs provide financial assistance for start ups. You can apply for a term loan, working capital, or an asset backed loan, based on your company's requirements. As a start up, if you have an impressive business model, banks will be willing to provide you with the finances you need, as long as you can show them that you have the ability to repay the loan later on.
  2. Start Ups in Novel Areas: While financial institutions may not be very willing to take the risk, they do lend money to those companies starting up in novel areas, where a business model has not yet been established. However, due to the increased risk, the creditors are likely to ask for higher collateral as security, as compared to start ups in areas where business models have already been established.
  3. Research and Development: As a start up, it is possible to obtain a loan for research and development. You can avail of an asset-backed loan to develop new technology, or for marketing and other business expansion efforts. Asset-backed loans are generally provided based on the market value of a residential, commercial, or industrial property that is to be pledged as collateral. Financial institutions generally lend up to 70% of the assessed market value of the property, with a loan tenure of around 7 to 15 years.
  4. Equipment and Machinery: If you own a start up, you can avail of a term loan to buy equipment or machinery for your company. Financial institutions are favourable towards extending loans for the purchase, set up and commission of capital assets such as equipment or machinery to be used in business.
  5. Stocking Inventory: If you'd like to obtain a loan to help finance the stocking of inventory, you can avail of a working capital loan from a bank or an NBFC. First, the creditor will assess the working capital requirement of your business based on the projection provided, and will mostly take a conservative approach to lending working capital funds.

Benefits of Business Loans for SMEs

As with car loans, home loans and personal loans, there are many different kinds of SME loans available. Here's a look at the benefits of the different types of loans that SMEs can avail of:

  1. Unsecured Loans: Under the Credit Guarantee Fund Trust Scheme for Micro and Small Enterprises (CGTMSME Scheme), banks and NBFCs are provided with a framework to sanction loans worth Rs 1 crore to micro and small enterprises, without any collateral security. These loans can be term loans, or working capital loans, but the money acquired cannot be used for marketing or technology and development. With an unsecured loan, start ups don't have to put up their valuable assets as security. Unfortunately, due to the unsecure nature of the loan, creditors are quite selective about sanctioning these types of loans, and only few start ups actually get approval on their applications. If you do not wish to avail of a loan under this scheme, many banks and financial institutions provide collateral-free loans, but of a lesser value. Mostly, you can get a loan up to Rs. 30 lakhs without putting up any collateral or having to provide a guarantor for the loan.
  2. Flexible Pay Back Option Loans: You can choose to avail of a flexible loan that offers certain added benefits over an existing term loan. Many financial institutions provide flexible pay back options, allowing you to pre-pay the loan with idle funds without an additional penalty fee or cost. It also allows you to re-avail the pre-paid amount within the drop-line facility at any time within the loan tenure, without any additional documentation. Depending on the creditor you choose, you might even be able to pay for only 5% of the utilised loan amount every month, with interest being charged only on the outstanding amount, reducing the financial burden on your start up.
  3. Online Applications: Almost every bank and financial institution that offers business loans will allow you to apply for the loan directly from their website. This allows you to complete the application from the comfort of your home, and prevents you from having to make several trips to the creditor's office to fill out forms and submit all the necessary documentation.
  4. Instant Approvals: Depending on the amount of your loan, the kind of business you deal in, and the urgency of your loan application, it is possible to apply online for a loan, and even get instant approvals for the same.

Things to Keep in Mind while Applying for a Loan

When you apply for a loan, there is a small chance that your application could get rejected. Primarily there are two reasons why this could happen. Firstly, your credit history might not be very good, so the bank might not think of you as a safe option. Secondly, your business plan could be weak, and the creditor might assume that you will be unable to repay the loan at a later stage. Before applying for a loan, it's always a good idea to check your credit history and make sure it is up to date. Then, formulate a concrete business plan, and attach it with your application. Ensure that you have all the documents the creditor asked for in the loan application, and this will increase the chances of your loan getting approved.

Whom to Approach for a Loan

Both banks and NBFCs provide SME loans. IIFL is one such NBFC that offers entrepreneurs three kinds of business loans:

  1. Smart SME Loan: This loan is designed to help you fund your working capital needs, allowing you to run your business smoothly. You can avail of a revolving line of credit with this loan, which allows you to meet any unplanned or emergency monetary needs.
  2. Insta SME Loan: As the name suggests, this loan helps you meet your immediate business needs. The loan requires minimum documentation, and has an instant approval facility. It is the preferred loan for micro enterprises that deal in small-scale manufacturing, retail, wholesale, and services.
  3. Flexi SME Loan: Every business is unique, and the Flexi SME Loan has been designed to help you meet the unique requirements of your business. It is a combination of a term loan, and a revolving line of credit, which provides you with the flexibility to decide what to use the procured funds for.

Every bank and NBFC offers a number of different kinds of business loans that you can avail of depending on your business structure and needs. The new government initiatives as well as the number of loan options available has definitely made it easier for SME businesses to quickly and easily procure the funding required to give their business a boost.

India Infoline Finance Limited (IIFL) is an NBFC, and is a reputed name when it comes to financial solutions such as mortgage loans, gold loans, capital market finance, healthcare finance, and SME finance.

At IIFL, we help you meet long term and daily working capital needs of your business through our specialised SME loans. You can choose from a revolving line of credit or a term loan or a combination of both through our customised loan solutions. All in all, an IIFL SME Loan will enable you to optimise your borrowing cost and ensure that you have timely access to funds.

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