Starting Your Entrepreneurial Journey? Build Your Credit History Along The Way.

There has probably never been a better time to start a business in India. Multiple positive developments in the recent past have laid the foundation for a thriving entrepreneurial ecosystem for years to come. Some Governmental initiatives such as “Make in India”, “Startup India” etc., have indicated that at the highest level of policy-making, there is now a strong desire to support new businesses. Increasing digitization and improving infrastructure means that even the youngest of businesses can now reach out to millions of potential customers.  The brightest minds in the country are now being drawn away from previously coveted corporate jobs and are opening up to the challenge of executing an indigenous endeavour from ground-up. These are exciting times.

These young businesses can bring significant value to the Indian economy. At their helm are smart, passionate entrepreneurs with products or services which cater to tangible demands in the market. With the right support and nurturing, many of these ventures can grow into successful businesses. However, far too often, we see many of these budding entrepreneurs failing to realize their true potential. While there can be many reasons why a young business fails to scale up, research globally has identified a clear obstacle – lack of appropriate and timely credit.

The problem of the “Missing Middle” in developing economies is well documented. Such economies have a large number of micro-firms, some large firms but very few medium-sized firms. The absence or the paucity of medium-sized enterprises isn’t because these businesses lack the potential to be profitable, but because access to finance is traditionally a cumbersome process. In India, less than 1/4th of the financing demand of SMEs is met by formal institutional supply. Small businesses fail to benefit from the leverage which debt financing provides and is essential for propelling growth. As a consequence, SMEs contribute to only 8% of the Indian GDP – a stark contrast with the 40%+ contribution made by small businesses in developed economies.

This is not to say that the financing needs of SMEs are being completely ignored. For more than two decades lending to small businesses has been a priority agenda item for policy makers and regulatory bodies. A host of initiatives have been launched but on-ground progress has been slow. A key bottleneck is that these small-medium sized businesses are unable to furnish adequate credit history.

In a country like India, with a thriving informal finance ecosystem, most small businesses do not build credit records in their initial days as they can access finance through informal lending channels. As the size of their operation increases, so does their financial need. At this point, they are unable to turn to formal means of credit supply due to the lack of universally recognized documentation. At this stage, their growth is stunted as the informal market is unable to provide required financing at reasonable rates.  It is a perfect Catch 22 scenario – to get credit you need to have prior history but to have prior history you need to secure credit!

Building credit history with a bureau, e.g. CIBIL, takes time. Start small, be patient and build it over time. In India we now have personal as well as business credit scores available separately, though the former continues to be the more dominant decision input to most underwriting models. The credit worthiness of the promoter of a small business is crucial since the fortunes of the business are so closely entwined with his personal credit standing. It is thus vital to establish and grow your personal credit score. Start with small loans and service them in a timely fashion. If you are unable to get unsecured financing (e.g. a credit card), you can potentially start with a secured loan (e.g. auto loan) or a loan which is backed by a guarantor. Do not over-leverage your self – having multiple loans outstanding and/or high utilization on your existing limits negatively affect your score. Avoid such credit behaviour. Most of these points apply to business credit scores as well – start small and diligently service re-payments.

The entrepreneurial journey can be a deeply rewarding one. Focus on building your credit history along the way to help achieve your goals.

vaibhav

Vaibhav has over seven years of experience in the financial services industry across analytics, sales and trading. He has worked across major financial centres in Asia managing equity portfolios of large institutional investors across the region. In his last role prior to joining CF, he was a member of the Program Trading desk at Deutsche Bank’s Sydney office. He holds a Bachelor’s and Master’s degree from IIT Kharagpur in Electronics Engineering and is a CFA Charterholder. 

Vaibhav heads Business Development at Capital Float. 

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Considerations for educational trusts to keep in mind while availing finance

To upgrade the quality of education delivered in their school, authorities running the institution may occasionally need to apply for loans. The first thought that strikes while contemplating Indian school finance is one of approaching a bank. The low rate of interest and general trust in the banking system draws many private schools to these established lenders.

Although banks offer loans to businesses and other organisations, when it comes to financing educational institutions, things can be rather challenging, and it may take long before the school actually receives the requested amount for use. The reason for this is complex eligibility criteria and the long list of documents necessary to get the loan application approved.

School finance in India is granted to institutions that are backed by promoters or a trust. While applying for the loan, a copy of the trust deed or memorandum of association needs to be submitted to the lender. However, when the loan is being applied through a public sector or private bank, it may also ask for hard copies of several additional documents such as three to four years of financial statements along with their audit report, three to four years of income tax returns submitted by the school, bank statements and multiple KYC documents.

With such requirements, if the school has been running for just two years, it may not be able to get the loan. In addition to a pile of printed copies, the legal restrictions for funding educational trusts may also compel the bank to ask for collateral security or involvement of a guarantor. This is considered to be the hardest part as not many schools can afford to hypothecate a valuable financial asset to the lender.

Is there any other alternative for private school financing? Can these institutions securely apply for their loan and get the amount in minimum time without going through the hassles of submitting numerous documents and arranging for collateral? The answer, fortunately, is ‘Yes’.

Keeping up with the plans of promoting quality education in India, digitally operating non-banking finance companies (NBFCs) called FinTech companies have come up with a borrower-friendly lending model. They provide school finance on easy terms and conditions that merely require the borrowing institution to:

  • Be a private school with fully functional classes from LKG to VIII/X/XII grade
  • Be run by promoters or a trust
  • Have an annual fee collection of more than Rs. 75 lakhs
  • Have the school building on its own property

Since the application process is digital, the school needs to upload only soft copies of the documents proving its eligibility. Moreover, financial/bank statements are required for just two years. There is no need to provide any security or guarantor promises: FinTech loans are collateral-free.

If you have plans to construct a new building in your school, stock up the library, refurbish the labs or add any other facility to enhance the education service, the answer on how to finance a school improvement plan lies in an unsecured loan from a FinTech.

Apply for Unsecured school loan

Capital Float is a leading school finance provider in the Indian FinTech industry. We offer quick loans of up to 50 lakhs to fund school development. To know more about our finance options, call us at 1860 419 0999.

Oct 24, 2018

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Advent of the Business Technologist

The tech revolution has caused several traditional roles to evolve and assume new dimensions and responsibilities in recent years. One such role is that of the Business Analyst (BA). Larger multinational companies were the original movers behind the creation of this unique role. All these organisations inevitably had one thing in common – meticulously planned and detailed organisation structures. In such an environment, BAs were tasked with continuously improving systems and processes while driving IT adoption across the board to govern the same.

The recent waves of start-ups resulted in the organic transformation of this traditionally vertical-based specialist into that of cross-functional professional with the expectation of being able to deliver on all fronts, cutting across business verticals. The prominence and necessity of such a role to drive strategic, tactical and operational excellence in the start-up environment, is now seen as more of a necessity than a luxury. These individuals, with evolved professional capabilities, are akin to the ‘Smart Creative’ that Google has postulated. They are hands on, driven by data analytics and are known to bring a fresh perspective to the table, consequently making them one of the most sought after employees in the market.

The advent of the Business Technologist has been triggered by the rise of sophisticated challenges that require a nimble response mechanism from a technological perspective. Businesses are constantly attempting to overcome new challenges as they arise. Technology, which is advancing at an exponential rate, becomes the perfect vehicle to address these challenges. Establishing a robust response mechanism to resolve them prepares the organisation to swiftly move on to the next challenge. Business technologists often become the architects and propagators of this change within organisations.

The stark contrast between the BA and the BT is highlighted in the overall responsibilities assumed by them. For instance, BAs are responsible for overseeing a process and ensuring that they optimise it to a state of best practice. BTs on the other hand are in a position to innovate and redesign the underlying process itself. This redesign can be caused by a variety of reasons, ranging from lack of IT adoption, the existence of better delivery models, to uneconomic business practices. It can even be a consequence of the process not being in line with the overall strategy of the organisation. Such is the liberty that is given to the BT.

The emergence of this professional leads us to the conclusion that success of technology does not depend merely on its adoption – it is more dependent on understanding the implications of its deployment in the most complex business environments. All this while ensuring that maximum value is being derived from these potentially capital intensive technology ‘solutions’. One may argue that this is the responsibility of the CIO or her team – someone whose role in the organisation is to work primarily on strategy or the execution of technology. However, given the dynamic nature of roles and responsibilities in the modern-day work environment, organisations must have BTs spread across business functions, as well as lines of business. The failure to do so is likely to result in sub-optimal efficiencies.

Much like the ‘rise’ of the ‘Business Analyst’, which was a direct consequence of the tech revolution, the age of the start-up has led to the advent of the Business Technologist. Sure, it’s not how you can expect anyone to introduce themselves in a corporate context. As a matter of fact, until a few years ago, the BT didn’t even exist. Today we can go ahead and safely say that such individuals must be well versed in a variety of disciplines – ranging from operations, business strategy, unit economics and talent development – to core technical areas such as IT, engineering architecture and others.

This distinctive role can also be compared to that of an in-house management consultant. The key difference between the two professionals is that the business technologists are not afraid to roll-up their sleeves and get their hands dirty. They will not stop at a prescriptive solution, but will get knee deep in the problem while attempting to solve it. The quicker the organisations embrace this evolved being, the faster these organisations can become flagbearers of the new phase of the technological revolution.

Arjun Nair

Arjun has a deep understanding of the Indian SME universe as a consequence of having dealt with this juggernaut for the last 5 years. Starting off his career at Tally, where he gained insight into this industry in a variety of areas including IT adoption, overall size of universe, etc. He now spends his days at Capital Float leveraging this information to increase customer acquisition. True to the article, he also spends his time ensuring cross functional synergy across functions in the organisation. From enabling the SME universe with IT at Tally he now wishes to empower them through financial inclusion.

Arjun is a Business Technologist at Capital Float

Oct 24, 2018

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Practical Implications of Asset Allocation

Asset allocation, despite its importance in portfolio management, is perhaps the last thing on the mind of the novice investor. Before regaling the virtues of asset allocation, a layman’s definition of asset allocation is perhaps warranted, so here goes: asset allocation is a process by which an investor aims to enhance the risk-reward ratio of a portfolio of risky assets. It is important to stress upon two things here: (1) asset allocation is not a one-time exercise, it is an ongoing process; and (2) the use of multiple asset classes to convert a portfolio of risky assets into a benign money-making machine.

Equipped with a basic understanding of the theory behind asset allocation what is stopping the novice investor from going ahead and enhancing portfolio returns? The reason is that the effect of asset of allocation rests largely on finding asset classes whose returns are uncorrelated with one another – the lower the correlation, the better. For instance, it is popular belief that gold is a hedge against inflation i.e. gold prices and inflation rates move in tandem. Therefore, what one loses in purchasing power is compensated by an increase in gold prices. This, however, is a long term phenomenon i.e. one may witness large deviations in the short term.

The key to benefiting from asset allocation, therefore, is to periodically tweak the portfolio for changes in correlations between asset classes and include new ones with the overall objective of enhancing the risk-reward ratio of a given portfolio. Although this may seem like too onerous a task, the novice investor need not worry. A certain level of diversification via asset allocation can be achieved by following the below steps:

  1. Ascertain whether you have surplus money to invest – a simple equation of income less expenses. The figure you ascertain will comprise your overall pie available for asset allocation.
  2. Understand your needs as defined by three key parameters viz. risk appetite, return requirements and time constraints. Your needs are a function of your age, marital status, number of dependants etc.
  3. Identify avenues to invest in the broadest categories of asset classes viz. equity, debt, commodities, real estate and alternative asset classes.
  4. Steps 2 and 3 will require a bit of periodic back and forth because the asset class(es) you choose will depend on your needs. E.g. someone with a higher risk appetite may have a higher percentage of equities in the pie than someone with a lower risk appetite. The latter investor may lean towards debt investments.

In summary, the age-old adage of not putting all of one’s eggs in one’s basket applies here. A systematic approach to asset allocation with disciplined and timely execution can ensure that investors, novice and otherwise, hold well-constructed portfolios and therefore benefit from asset allocation.

Vinay Basavaraj

Vinay boasts of a decade of experience working in both large and small organizations. His roles have ranged from sales to operations and even a stint in academia. He currently manages affairs in capital markets in Capital Float.

Oct 24, 2018