Going the entrepreneurial route is a tough decision to take. Several people contemplate it, but only a few take that leap. Starting a business may be very challenging, but what is even tougher is running a business.
Most small businesses are faced with liquidity crunches. They are required to make payments for raw materials, overheads and staff before their receivables become due. Such businesses have not earned the confidence to ask their suppliers for a lengthy credit period. On the other hand, their customers are able to demand 30, 60 or 90 days before the invoice becomes due.
In such a scenario, small businesses find themselves at the mercy of large banks to raise short-term loans. Here are some challenges that SMEs face while applying for a short term business loan.
Estimating the Money Required: If a business underestimates the amount of money required, it would find itself unable to implement projects, execute orders, retain employees and/or realize its expansion plans. On the other hand, if a business secures a loan amount that is significantly higher than its requirements, it would be taking on an interest burden that is not justified by its bottom-line. Taking the right amount of loan can help the SME adequately address the working capital need without having a surplus or lack of funds.
Applying to Traditional Banks: Most entrepreneurs do not have the funds to invest in their businesses and keep it running for a couple of years. Borrowing from friends and family can also be tricky or simply not an option. In such scenarios, small businesses often turn to traditional financial institutions to raise short-term loans. However, these loans have a very time consuming and complex application process. There is plenty of paperwork involved. The business has to present financials in a predetermined format with supporting documents and detailed projections.
Loan Approval: The process of loan approval can be long and complicated. Banks may take several months to even reject a loan application. Mostly, loans are provided only against collateral, which the business owner may not have. Even then, lenders would conduct a thorough analysis of the financial standing of the small business. The lenders would verify all the information provided by the applicant and this takes a long time, during which the liquidity problem of the business continues to worsen. Therefore, such loans may not even be a viable option for short-term, working capital requirements.
Repayment of Loans: Most short-term business loans from traditional financial institutions have a fixed repayment schedule that is in no way linked to the cycle of receivables of the small business. Moreover, they do not allow prepayment of loans. Thus, these businesses would need to continue to bear the interest rate burden, even if it has the funds to repay the loan.
Against the backdrop of these inherent problems with securing short-term finance, technology has helped offer relief from severe liquidity crunches. FinTech companies like Capital Float rely on cutting-edge technology to offer innovative products that are aligned to the requirements and nature of small businesses. Here are some points to keep in mind while applying for a short term business loan.
Easy Application Process: The application can be sent online via a form that takes around 10 minutes to be filled. The borrower can digitally upload all the required documents.
Fast Loan Approval: The use of powerful algorithms allows Capital Float to approve or reject an application within minutes. Thus, a small business does not need to wait for several months to receive a response. Once an application has been approved, the short-term business loan is disbursed within 72 hours.
No Collateral, No Guarantor: Loans offered by Capital Float do not require small businesses to put up any collateral. Unlike traditional lenders, there is no requirement of a guarantor to validate the loan request.
Loans Designed to Suit Their Purpose: Probably the best news is that the finance products offered by Capital Float take into account the specific requirements and nature of small businesses. For instance, the Term Finance product has been designed specifically for manufacturers, traders and distributors, while the Online Seller Finance product is perfect for businesses that operate on online marketplaces. The Taxi Finance product is meant for companies that are part of the booming radio taxi business in India. Merchant Cash Advance is a loan against card receivables and Supply Chain Finance is finance against invoices from blue-chip companies.
Repayment of Loans: The repayment of loans offered by Capital Float either be in correlation to the receivables of the business or may be in the form of flexible weekly instalments. Moreover, there are no pre-closure charges, like those applied by banks and other lending institutions.
Small-term business loans are a highly effective way to finance business cash needs. However, one needs to calculate the amount carefully and then identify the right financing institute and the right product. A small business needs to opt for customized products that suit their individual requirements and offer flexible repayment options. The innovative short-term finance options available today allow small businesses to continue their daily operations without disruption and gives these enterprises confidence to grow without apprehension.
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Businesses need additional finances either for growth in terms of scale or for expansion into newer product categories, or for geographical expansion. Sometimes, additional finances are also required for day-to-day operations. Going the traditional route via banks and financial institutions may not always work, especially for small business that are still in the process of building up their brand and market presence. The merchant can also withdraw from his/ her working capital loan. But, if the working capital limits are reached, and if the bank is unwilling to extend more working capital, then the merchant has to look for funds from other sources.
Fortunately, a whole new option of loans based on card swipes at POS terminals offers a great alternative to traditional finance. “Merchant cash advance” is a form of finance where sales from card machines can be used to raise loans. Merchants who allow their customers to pay with a credit or debit card can avail of such credit advance. Merchant cash advance loans are repaid by the POS partner on behalf of the borrower as a percentage of every sale registered on the POS machine.
When merchants accept credit/debit cards as a form of payment, the cards are swiped on a point-of-sale (PoS) terminal. Once the card and the sale amount is verified, the transaction is completed by entering a PIN number. Such sales are actually credit sales as banks credit the sale amount on the next day, or as decided with the merchant, after they deduct transaction charges.
There are several reasons why merchant cash advance is a great alternative to banks and other traditional lenders. Apart from the lengthy process and paperwork, the terms of traditional credit are much tougher for small businesses that have just set out on their entrepreneurial journey or are about to move into an expansion phase. Here is a quick look at why merchant cash advance loans are a better option for SMEs:
No collateral required
Merchant Cash Advance is a completely unsecured loan. The borrower isn’t required to pledge their property or assets to avail themselves of the loan.
Quick, easy loan disbursal
Merchant cash advance loans are usually disbursed easily and quickly as the onus to repay the amount is with the bank that provides the PoS terminal. Thus, merchant cash advance companies have to only ensure the regularity of the sales and the commitment of the merchant to be in business for the duration of the loan.
The borrower can apply for the loan by using a mobile device or a desktop, as long as the device is connected to the internet. The documents required can be scanned and uploaded at the time of the application. The borrower isn’t required to visit our office. This hassle-free application process provides for a comfortable experience to the borrower.
As the onus to pay the instalment is with the provider of the PoS terminal, which is usually a bank, the merchant cash advance companies are reasonably assured of receiving repayments regularly, provided the merchant’s business has no issues. When the PoS terminal providers credit the merchant’s account with the proceeds of their credit card sales, they transfer a fixed percentage of these proceeds to merchant cash advance companies that have provided the merchant cash advance.
Flexibility of Repayment
The repayment of merchant cash advance loans can be pegged to the sales volumes. As a result, merchant can direct their PoS providers to pay less during low seasons. In the case of merchant cash advance loans, the merchants may also have the flexibility to structure their repayments to suit their ability to pay. Instead of making monthly repayments of the loan, they can opt to repay in weekly or fortnightly instalments as well.
Advance as a multiple of card sales
Merchant cash advance loans are ideal for merchants who have consistent credit/debit card sales. Merchant cash advance companies will first evaluate the credit worthiness of the merchant by verifying their past sales and business performance. Once merchant cash advance companies are satisfied, they will decide the basis of the loan advance and how much they can lend to the merchant. For example, Capital Float uses the monthly card settlement amount as the basis for deciding the loan amount. We lend up to 200% of the monthly sales made by the borrower from card swipes.
No pre-closure charges
Capital Float doesn’t charge the borrower any pre-closure charges if the borrower chooses to close the loan ahead of the agreed upon tenure. Additionally, we maintain complete transparency in fees and charges. The borrower is required to pay up to 2% of the loan amount as processing fees, while applying for the loan.
The usage of PoS terminals has significantly increased after the recent demonetization drive. The Government of India is pushing Indian banks to install PoS terminals so that the nation can progress towards becoming a cashless economy. With cashless transactions set to rise with card swipes and PoS machines, merchant cash advance loans will soon become a popular way of raising short-term funds to finance working capital requirements.
Capital Float is one of the few financial companies in India to offer merchant cash advance loans. We have already tied up with POS terminal vendors like Pine Labs, ICICI Merchant Services, Mswipe, MRL Posnet, Bijlipay, and more. We provide a merchant cash advance up to Rs. 1 crore for a convenient tenure of six months to one year.
Oct 24, 2018
We have created ‘GST- An Overview, Its Impact & Significance’ as a comprehensive GST handbook comprising of every aspect related to this new reform, with a special focus on Small and Medium Enterprises (SMEs). Starting with the salient features, this GST ebook takes readers through the three main components of the tax which eliminate the cascading effects of taxation. Further, the registration process, four-tiered tax structure, the benefits as well as challenges are explained in the GST whitepaper.
How this Whitepaper will help simplify GST for you
- Revised GST Rates Update
- Industry-wise Analysis of GST Impact
- Clear, Brief Descriptions of Key Aspects
- Easy Roadmap to Implement GST Changes
- Business Advice by Financial Experts
Oct 24, 2018
Achieving growth is a dream for every business, more so if it is a small or medium enterprise. Who doesn’t like expanding their production and also the revenue of their business? While business expansion is necessary, one thing which is primarily required for business growth is finance (with acumen being the second important ingredient). How does one secure business finance?
Banks and financial institutions provide the solution – business loans.
Business loans are the perfect solutions to financing which enables business growth. Banks and financial institutions lend the much-required business finance in India to business enterprises. This finance comes in two variants – secured loans and unsecured loans. Do you know what they are and how they are different?
Secured business loans
Secured business loans are also called asset-backed loans. These loans are granted on the value of an asset which is pledged as collateral for the loan. These loans are risk-free from the lender’s perspective as in the case of default by the borrower, the asset which is pledged is possessed by the bank to fulfill the loan liability.
Unsecured business loans
Unsecured loans, on the contrary, do not require any collateral or security. The loan is granted on the repayment capacity of the business which is indicated by the enterprise’s creditworthiness. These loans are granted as short-term loans which also have short repayment tenure.
Difference between the two
Both secured and unsecured business loans are fundamentally different and their differences are as follows:
|Secured Loans||Unsecured Loans|
|They require a security against the value of the loan||These loans are granted without the requirement of any collateral|
|The interest rate is low||Interest rate is high|
|The amount of loan depends on the value of the asset pledged for the loan||The amount of loan depends on the repayment capacity and creditworthiness of the enterprise|
Do unsecured loans help in business growth?
Unsecured loans are very easily available and do not require any collateral. They thus have various advantages which make them an ideal solution for quick financing. But do such loans also enable business growth? Let’s find out:
No asset backing required
Secured loans are limiting in the sense that they require business assets to be pledged as collateral. Unsecured loans are easily available and they do not require any business assets to be secured. As such these loans are not restricting. If your business is small and does not have many assets, it becomes a problem to avail a secured loan. This hinders the growth of business. Unsecured loans, on the other hand, can be availed without any assets.
The quantum of loan is not limited
Suppose you require a loan worth Rs.50 lakhs but the value of assets which are to be pledged is limited to Rs.40 lakhs. Would you be able to acquire the desired loan? Secured loans allow loans limited to the value of the asset pledged. Even in this case, the total value of asset is not allowed as loan as a margin is retained by the lender. So, if you have an asset worth Rs.20 lakhs and want a loan of Rs.20 lakhs, you would be able to avail only 80% to 90% of the value of your asset (Rs.20 lakhs in this case) as loan (i.e. Rs.16 lakhs or Rs.18 lakhs). In case of unsecured loans, the loan is granted on the business potential and creditworthiness and not limited by the value of any asset. Thus, businesses can avail an unsecured loan as per their requirement for aiding growth.
Unsecured loans are easily available as the funds are sanctioned within days of the loan application being done. As such, these loans provide the necessary funding to businesses in a short span of time which can be used to increase business profitability and boost business growth. These loans come in handy when the business is poised to grow following a surge in demand. As the loan is easily available, high demand can be met by increasing production. High demand yields better revenue for the business and enables it to grow.
Ideal for young businesses
Businesses which are still in their nascent stage require funding to expand and grow. This funding can be easily secured through an unsecured loan as it does not require any collateral, which is hard to source for budding businesses. Thus, the growth of these young enterprises is dependent on unsecured business loans.
Unsecured business loans, therefore, play an important part in the growth of businesses. Though long term secured loans are essential for long-term finance, short-term unsecured loans help businesses meet their more immediate requirements, which has a direct bearing on their growth.
NBFCs offer unsecured business loans which are also called as business installment loans or term finance. This loan offers the following benefits to businesses:
1. A loan of Rs.1 lakh to Rs.1 crore can be availed by businesses for any of their requirements.
2. There are no hidden or additional charges under the loan. Applicants are required to pay only a small processing fee of 2% of the loan amount borrowed. Apart from this there are no foreclosure or part-prepayment charges incurred on the loan.
3. Certain NBFCs use customized credit criteria while underwriting customers. The credit offering is tailored as per the applicant’s requirement.
4. The loan is sanctioned within 3 days of successful application thus providing the funds at the earliest.
5. No collateral security is required for the loan.
6. Application for the loan can be done quickly through the online medium which reduces unnecessary hassles.
Unsecured loans sometimes prove to be that important source of funding without which businesses couldn’t have grown and achieved enhanced profitability. If you are also looking for a business loan for your business growth avail an unsecured loan today!
Oct 24, 2018