For a business, the need for an infusion of funds is not unusual. The requirement can be for a variety of reasons;for a temporary lull in the cash flow, for purchasing inventory, for expansion, and even opening a new business. It is during such times the facility of a business loan is most felt.
Small business loan is one of the major components of the portfolio of most lenders, yet when it comes to sanctioningit is easier said than done for small business people.
Most traditional lenders insist on collateral security which many businesses are unable to furnish. On top of that, there is the issue of creditworthiness which is very stringently adhered to by banks. Fintechs have a different approach to small business loan opening ampleopportunities for entrepreneurs.
How does business loan in India help?
Business loan is the lifeline of almost all enterprises irrespective of the nature of the business activity. And there are definite innovative products catering to every need, even starting a small business. Let us look up various grounds where a small business loan is welcome.
➢ Increasing cash flow is the basic tenet of smooth operations to achieve potential.
➢ Provide funds for expansion.
➢ Purchase of new machinery and equipment, both for ease of doing business and upgrade of obsolete items.
➢ Provide access to new technology which can add to efficiency and generate higher revenues.
➢ Fund specific needs of the business even for seasonal spikes.
➢ Launch a new project or increase its geographicalfootprint.
Basic types of Small Business Loan:
Before going into the other details of the loans proper, it is important to know the nature and characteristics of small business loan.
A lot is heard about secured and unsecured loan. While banks are comfortable with a secured business loan, Fintechs offer an unsecured business loan which eminently suits young entrepreneurs and MSMEs perfectly.
➢ Secured Business Loan: It is a form of security sought by the lender as collateral. The security has to be in the form of tangible asset which can be taken over by the lender in the event of default. The benefit is in the form of a lower rate of interest as the loan covered by adequate security. Banks insist on secured loan rather than the unsecured variety.
➢ Unsecured Business Loan: In this type of loan, no collateral is sought and is thus referred to as unsecured. The borrower promises to repay the loan as per norms. Almost all Fintechs offer unsecured business loan, which is ideally suited to the small enterprises who are often unable to provide any collateral. On the flip side rate of interest on an unsecured loan is higher.
Features of small business Loan:
Unlike traditional lenders like banks, Fintech companies offer a range of business loan products to cater to the specific needs of small business people.
The distinguishing features are as follows:• Swift processing and disbursal in a time frame of 48-72 hours.
• Collateral free.
• Repayment terms are flexible and tailored to business requirements.
• A wide array of products to suit every business activity.
• Competitive interest rates.
• No hidden charges.
Various types of Small Business Loan in India:
➢ Term Loan: The very name is suggestive that the loan is granted for a definite period by which it is liquidated. Depending on the tenure, they are either referred to as Short Term or Long Term. The rate of interest is also linked to the tenure – longer the term, lower the interest.
➢ Line of Credit: It is the other name of an Overdraftfacility, where you are free to draw need-based funds to the extent of the credit limit. It is beneficial for its flexibility of withdrawal and deposit, which directly impacts the interest burden. Only the used amount is reckoned for interest. It is ideally suited for a businessthat needs regular cash flow as also working capital.
➢ Invoice Discounting: It is an instant small business loan against outstanding invoices or receivables. It is an effective alternative to the term loan and line of credit. You are provided with instant funds to the extent of 90% of the unpaid invoices to ensure regular cash flow.
➢ Merchant Advance against POS: It is an emerging trend where customers pay for purchases using the POS terminal. Through this loan, you are assured of instant funds concerning the value of POS transactions daily.
Eligibility: Criteria for a small business loan:
The eligibility criteria are similar for both the banks and Fintechs, but the approach of the latter is liberal. Let us summarise the primary ones.
➢ The promoter should be an adult, but below 65 years of age.
➢ The business ownership can be Proprietor, Partnership, PLC or LLC.
➢ The business should be operational for at least six months or as specified by the lender.
➢ The quarterly turnover should be greater than Rs.90K.
Documents required for a business loan in India:
While the banks insist on elaborate documentation, the Fintechs look for bare essentials. The summary of the documents is:➢ Valid KYC documents, including PAN card of the promoter and business.➢ Aadhaar Card of the Promoter.➢ Business-related documents including registrations, licenses and deeds, if applicable.➢ Financial reports and statements as specified by the lender.
Fees and Charges:
| Rate of Interest | Between 15% and 27% |
| Processing Fee | 1% to 2% one-time |
| Pre-closure | Nil |
| Amount of Loan | Rs.50K to Rs.2C |
| Tenure | Up to 36 months |
Application procedure for a small business loan:
It is online both for banks and Fintech. But in the case of banks, it is deemed an expression of interest, while for the latter, it is fully digitalised. It can be accomplished in three steps:1. Online submission of application.2. Upload the required documents.3. Evaluation, Sanction and Disbursal.
Bottom Line:
Small business loan in India is a boon for young entrepreneurs as much as established ones. With the arrival of Fintech on the scene, the contours of small business loan in India is seeing great changes with innovation and a new approach to credit. They are the best bet in terms of speed, range and tailored products to meet every need of the borrower, which includes starting a small business.
