Digital Lending and Its Impact on SMEs in India

The growing entrepreneurship and start-up culture in India has increased the demand for flexible business loans to support such new ventures monetarily. However, funds that come through banks, government agencies and other financial institutions are not always easy to procure. The detailed paperwork, the long waiting times to get approval for the required amounts, and the high interest rates to be paid over an extended period deter many new businesses from approaching the conventional sources of working capital.

Propelled by technological developments, an alternative source of loans for small business has emerged in the form of new FinTech (financial technology) lending. In India, the FinTech market has witnessed a period of rapid growth in the last two years. As per reports by KPMG India and NASSCOM, it is expected to cross the $2.4 billion mark by 2020. Its lending model is driven by digital technology and is inherently different from the conventional approach that has been used by banks for years.

Most FinTech lenders specialise in micro financing and SME lending. The loan is granted promptly based on financial statements, bank transaction history and e-commerce transaction behaviour where applicable. As a leading player in the digital lending industry, Capital Float has already carved out its niche and is trusted by entrepreneurs who need quick loans to materialise the innovations in their business plans.

Why are SMEs shifting from conventional sources of finance to FinTech lenders? 

Credit underwriting has been a major challenge with regards to the SME sector. The loan officers in Indian banks still use outdated methods to determine the creditworthiness of a small business. Furthermore, the loans offered by banks are secured in nature, those that require the borrower to offer some collateral – such as real estate, gold, investment portfolio, machinery or stocks – as security. This prevents several enterprising ventures from availing finance even if they have good prospects to grow and the ability to pay back their small business loan on time.

A digital SME loan is comparatively easier to obtain. The FinTech lending structure is backed by the assessment of digitally uploaded documents. The creditworthiness is evaluated using big data, psychometric questionnaires and social media behaviour, in addition to the trading position of the concerned business. If the SME does not maintain a formal balance sheet, alternate documents throwing light on its prospects in the industry can be used to determine the creditworthiness.

The experience of procuring loans before the advent of FinTech revolution was not very customer-friendly. Borrowers had to fill in long paper-based forms, gather many documents in support of their applications and pledge an asset to the lender. Subsequently, there was a waiting period running into weeks before the small business loan amount was approved.

Digital lending companies have improved the user experience by leveraging technology to tone down the paper work and processing time. Just like retail shopping and online travel bookings, the capital market for SMEs also needed to evolve and move online.

Was there a need for this new source of small business loans? 

The emergence of FinTech sector for lending to small and micro enterprises is not only limited to India, but is a global phenomenon. An article published by Forbes has comprehensively analysed the case for this new source of business loans. The financial crisis of 2008 had left the banking sector with almost no scope for innovation. They were heavily regulated by new rules for lending and were urged to limit their risk by demanding for liquid collateral and Tier 1 capital. They also had to be more attentive than before to their back offices and compliance management.

Such changes encouraged finance-savvy and customer-focused talent pools to devise new ways, whereby technology could be leveraged to make borrowing easier. Digital lending services build a bridge between lenders and borrowers. There is a difference in the time taken to process the application, the underwriting process, the actual disbursal of the amount and the period for which the SME loan is granted. While adequate care is taken in evaluating the eligibility of a business for the grant, a FinTech company also ensures that there are no superfluous delays.

In line with the standards established by banks, an online lender must also ensure a high degree of transparency in the process of granting loans. At Capital Float, before a transaction becomes active, borrowers receive complete information on the rate of interest, the tenure of loan and any condition attached to the deal. There are no unpleasant surprises at the time of loan repayment.

Another advantage of procuring unsecured loans from a digital lender is that this new industry can adjust to changes more actively than conventional banks. With lower costs of underwriting using technology, lower rates of interest also become feasible.

Digital lending is helping a new class of business borrowers who have not been able to obtain funding from traditional sources. With an automated underwriting process and risk management, it has a lower operational cost and smoother loan processing. A major  of FinTech-based lending is the assessment of client’s credit worthiness. Unlike banks that use only income statements and formal credit history, a FinTech company gathers substantial data through social media and big data. What’s more, with a strong use of technology in lending, the focus on safety is also uncompromising. There are adequate measures to keep the customer details encrypted and secure. Moreover, they also facilitate tailored finance products keeping in mind the varying needs of different industry segments.

The underlying objective is to support promising entrepreneurs in getting quick funds and realise their new business ideas. Capital Float believes that SMEs can grow consistently if they have secure and quick access to funds. As the government continues to promote digital transactions through e-wallets, mobile-driven point of sale (POS) and Internet banking, the financial structure must also be modernised to give a further impetus to entrepreneurship and the ‘Make in India’ vision.

As a FinTech company, Capital Float has created a business model that is not limited by structural formalities surrounding banks and traditional lending agencies. Our aim is to serve client needs efficiently and help promising businesses flourish progressively.

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Coronavirus pandemic has impacted millions of people around the world. The virus has also affected lakhs of people in India, leading to several lockdowns to curtail the transmission of the virus.

These lockdowns have severely affected various sectors throughout India, chief among these being the restaurant industry. If the coronavirus pandemic lasts for a long period, people may get habituated with the idea of not dining out, which will inevitably take the industry longer to recover.

In India, the restaurant industry has faced numerous challenges because of the COVID-19 outbreak: the end of group dining at restaurants, protecting the health of both the employees and the customers, following the safety regulations laid down by the Government, working with a limited number of workers, running expenditure without revenues to match, etc.

Restaurants can address these challenges by actioning the following:

  • Focus on takeaways: Group dining has become a thing of the past due to the coronavirus pandemic. In this situation, focusing on building the business via takeaways would be a wise decision. This would promote social distancing and would prevent the virus from spreading while ensuring operations are sustained.
  • Collaboration: Restaurants can collaborate to benefit from each other’s strengths. This would not only reduce cost but also increase the number of customers (combining the customers of both the restaurants). The merged restaurant can prepare their best dishes (for which they are famous) and focus their efforts on selling these (which would also result in zero wastage). Collaboration would also help in merging the workforce and have more people available for extensive cleaning and door-to-door delivery.
  • Social media marketing: With the onset of COVID-19, traditional marketing wouldn’t prove to be fruitful. On the contrary, it will be expensive. Owing to the lockdowns, people are getting time to surf on social media. Thus, social media marketing would catch their attention. Restaurants will also be able to connect directly with their customers to build effective customer relationships.
  • Opt for online food ordering: Since people cannot go to restaurants, the only way for these businesses to operate would be through food delivery. They can list themselves on Swiggy, Zomato or other food delivery aggregators to increase sales. They can even opt for food orders placed directly through phone calls. This would reduce costs and create a revenue stream.
  • Create a social awareness program: The restaurants can create a social awareness program around frontline healthcare workers of COVID-19 by supplying them food. Apart from the element of social service, this can also be marketed or advertised on social media and other digital platforms to create goodwill amongst customers.
  • Follow the norms laid down by WHO on hygiene: There are operational challenges in the wake of the pandemic. To overcome those, restaurants should maintain hygiene by extensively using hand sanitizers. They should bear in mind that food safety should be their priority. The working stations should be wiped down at regular intervals using a bleach solution. The executives and valets should be cautious during food delivery and opt for contactless payments.

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6 Quick Tips to Consider Before Applying for a Short-Term Business Loan Online

Small and Medium-Sized Enterprises (SMEs) have received a tremendous fillip of late, with the Government pitching in to give a hands up to this very vital business sector. SMEs engaged in businesses ranging from electronics to ad services, or from engineering to textile to handicrafts routinely face a cash crunch that handicaps their everyday operations, as well as hampers plans for expansion.

SMES and the short-term loan

It takes immense courage to begin your business, and taking risks of establishing, sustaining, and expanding it can be prohibitive for many. Financing is the fundamental issue here, and many businesses are compelled to shut shop or to approach banks in order to raise short-term business loans.

Finances are the lifeblood for any enterprise, and any business plan worth its salt must include sound planning for fund sources as well. Short-term business loans and short-term finance are available in plenty and offer SMEs a chance to overcome their temporary financial problems as also provide an opportunity to expand their business. However, these loans are not without pitfalls. Here are some tips that will help an SME to take a well-considered decision when it comes to applying for short-term business loans:

1. Do your homework

SMEs are recommended to do adequate research to identify the option that are most suitable to them. Occasionally, and especially if the borrower has a good credit score, a simple overdraft or line of credit can help the SME to tide over their cash flow problems. Bank loans carry low-interest rates, but the paperwork involved and time taken to sanction can be burdensome. Crowdfunding, inventory financing, and credit card financing are options that can be explored. Promoters also help to finance a large chunk of working capital requirements. But if a short-term loan is a final option, a careful look at the costs involved can help to tip the scales over.

2. Try online loans

Short-term online loans are meant to be repaid anywhere between 90 days to three years. They are quick, convenient and flexible. A good deal of the paperwork process is cut off and friendly financiers also help eliminate the traditional application method of back-and-forth conversation. The huge advantage lies in not necessarily having to offer collateral. Provided an SME finds the right fintech lender, they can benefit from the speed of digital processing. Additionally, preclosure penalties and hidden charges are also avoided. Genuine financiers will also provide the convenience of flexible loan tenures.

3. Measure business liquidity

There is always a possibility that even a profitable SME can run into cash-flow problems, regardless of the numbers reflected on the cash-book records. Delays in receivables have hurt many a lucrative business, and are in fact a common cause for cash-flow mismatches. In such cases, measuring the liquidity of the business can be very useful for an SME in order to find an alternative way to mitigate problems of a cash crunch. The proper evaluation of liquidity can be extremely beneficial, and can be measured in two ways:

Quick Ratio It shows the capability of business in covering current liabilities with current assets, and utilises the formula:

Quick Ratio= (Current Assets – Inventory)/ Current Liabilities 

Working Capital

It is measured by calculating the difference between the current assets and current liabilities, with the formula:

Working Capital = Current Assets – Current Liabilities

Getting these figures in hand can help measure business solvency, and thus available funds can be duly channelised and prioritised.

4. Capitalise on credit score
It pays to maintain a good credit score history, in more ways than one. A good credit ranking can help you bargain for lower interest rates on short term business loans. Also, it opens up room for tapping into other means of raising money, such as getting into partnerships or seeking non-traditional lenders for funding.

On occasion, the lender may analyze both your business and your personal debt load, in addition to your credit score. If any of these is already high, the lender may hesitate to extend or provide fresh credit for your business. So, it is important to keep a tight rein over your credit utilisation, so that the services offered by the lender are not affected by your credit score.

5. Check APR

While comparing and selecting the best short-term business loan and finance service, one must always keep in mind the number of applications they are filing for apply for the term loan. After receiving multiple loan offers, one must select the most suitable loan offer by comparing the Annual Percentage Rate (APR) of every term loan lender. This is perhaps the most important calculation to estimate how expensive a loan is. Once you understand the logic of short-term business loans, it is easy to decide whether or not getting a particular loan is a right choice in terms of its actual cost.

6. Be ready for lender’s queries

Things don’t end here. There are chances that the lending party can contact the SME for verifying their documents that they submitted while applying for term loan. Thus, the SME owner must always be ready for answering any query regarding their documentation or regarding their future goals for the company. A small preparation toward this can prove to be very beneficial in getting a loan finalised. Ergo, shortfalls of cash may be inevitable, but not insuperable. A little bit of math and careful consideration of the choices can help you get the cash you need—hopefully at the price you can afford— without having to fall into a debt cycle.

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