India’s growth as an economic power in Asia has been consistent in the past one decade. In addition to the contribution of larger corporations and the multinational companies that have forayed here, this economic growth is significantly supported by the small and medium enterprises (SMEs) – a highly resilient and innovative sector that employees more than half of the Indian population.
The SME sector of India holds a huge potential for growth. However, the only challenge that could thwart their evolution is the lack of timely and adequate capital. A majority of the organisations in this sector operate as small entities that may lack the detailed documents or collateral required to procure loans from banks. Some of them are simply reluctant to offer their financial assets as security for the fear of losing them.
Given this lack of funds, small businesses face problems in meeting their operating expenses and are constrained from expanding their operations. Other problems include making payments on debt (owed to any other source of finance) and buying supplies to fulfil their contracts.
A solution against such inadequacies has emerged in the form of FinTech companies that focus on financing small and medium enterprises.
The FinTech revolution has been facilitated by digital technology wherein funds are instantly provided to eligible SMEs after the evaluation of certain documents submitted online by them. As a pioneer in Fintech lending, Capital Float has a 10-minute online application processing system, followed by a three-day disbursal TAT.
The ease of borrowing from online lenders has also raised a question – are these companies a threat to the conventional lending setup established by banks?
Contrary to what is usually perceived, FinTech companies have proved to be active partners for banks and are helping them disburse more loans. They have assisted banks in identifying good customers faster and in disbursing quick credit.
Thanks to the robust growth of the economy in the last few years and the positive outlook for the manufacturing and services sectors, there is sufficient room for growth for both traditional and new age lending institutions.
Although their functioning may differ, lending decisions for both have to be guided by a good knowledge of the customer’s ability to repay the loan. Banks typically lend to individuals or businesses that have high regular income and/or the willingness to offer collateral as security. The collateral must be a financial asset that can be liquidated in case the borrower is unable to pay back. Banks refer to income tax returns, credit bureau scores and operational history of the concerned applicant.
In comparison, and driven by their intent to know their customers better, peer-to-peer lending companies employ non-conventional data sources for underwriting loans to individuals. As these companies are in the private sector, they are not fraught by a levy of formal regulations in evaluating clients for funds. They use multiple data points, including information extracted from new age technology such as big data analytics, to assess creditworthiness. In addition, they offer unsecured loans that do not require applicants to pledge any of their assets. These companies use a streamlined underwriting process along with risk management. Their work is characterised by extensive use of sophisticated technology and lower operating costs.
As the business of FinTech lending grows, banks also acknowledge that their customers today are technology savvy, and they are looking at ways where collaborations with online lenders can help them serve their own customers better. Because of their success in the credit market, FinTech companies have proved that this can be done without operational or regulatory risk to the lender.
Since 2015, the digital lending industry has undergone significant changes, and chief among these is the shift towards a cashless system. The promotion of cashless technologies – digital wallets, Internet banking and mobile-based point of sale – has reshaped the financial sector. Later, demonetisation became a major factor that popularized the concept of online lending.
As a positive development, banks are now looking at online lenders as partners instead of as competitors in the market. Some banks have made arrangements where they, in return for a small fee, refer customers to p2p lending platforms that provide unsecured loans that not offered by banks. Through such a program, they facilitate loans for businesses that deserve to get funds but cannot procure them from banks due to long-established, inflexible rules.
Some banks are part of programs that let them use a FinTech organisation’s technology to provide small business loans. These loans are retained on the bank’s own books, but the FinTech company’s platform is used to approve and service them. The banks see this as an opportunity to offer a product they generally do not have on their portfolio but (by seeking the support of a peer-to-peer lender), it helps them retain precious client relationships.
Banks have large balance sheets that they can use to provide loans and cater to promising start-ups and SMEs with a consistent growth rate. However, their conventional underwriting practices have deterred them from promoting some SME segments. Conversely, the government has now highlighted SME as a priority sector in the economic development of India. Therefore, the banks have to meet their new business lending targets without incurring huge costs.
The credit gap in the market can be closed with a fruitful relationship between banks and peer-to-peer lending companies. Capital Float has custom-made loan products and fine-tuned technology to help banks achieve their goals. It can help them reach out to businesses in need, and banks can then use their financial strength to service them.
New age financial technology has transformed the way consumers, and businesses, borrow and spend money. The aim of FinTech lending is to enhance the convenience of financial services and bridge the gap between demand and supply of small business loans. To help their customers, banks can effectively work alongside peer-to-peer lenders instead of competing with them.
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The health of any business, including a manufacturing organisation, is determined by its cash flow.
It is not uncommon for the expenses of small and medium enterprises (SMEs) to exceed their income in the initial years. At times, they may have to price their products/services low to attract new buyers. The purchase of new equipment and quality raw materials can also increase the expenses for businesses.
Temporarily holding the operations is not a solution to cash flow problems because, with this recourse, the enterprise will not only suffer a revenue loss but also bear the burden of its fixed costs. These include amortisation, depreciation of assets, insurance premiums, property rent, taxes and utility bills.
A business that has planned to grow in its industry can keep fuelling its production processes and also invest in new manufacturing technologies by using an unsecured business loan for manufacturer.
As the name suggests, an unsecured SME loan does not require the borrowing entity to pledge any collateral. With a secure digital process, it is also easy to request for this funding.
How to apply for manufacturer/machinery loan
A FinTech company is one of the most favourable sources of an unsecured business loan for manufacturer. FinTech lenders often are non-banking finance companies (NBFCs) that use digital techniques to receive applications and disburse loan amounts in minimum time.
The advent of these organisations has made the credit industry more competitive. The start-ups that cannot afford to borrow from established banks due to high collateral requirements and other eligibility constraints find it easier to get an MSME loan from a FinTech firm.
All kinds of manufacturing concerns in India, including companies registered as a sole prop, partnership, LLP and Pvt Ltd can apply for these collateral-free loans.
Typically, a digital loan application available on the FinTech’s official website can be filled in less than 10 minutes from any secure Internet connection. To substantiate their credentials, the borrowers also need to upload the digital copies of ID proofs, PAN cards and the documents validating their business earnings. Such documents may be a balance sheet, recent profit and loss statement, the copies of processed income tax and GST returns and the papers comprising information on the ownership of the business.
Within minutes of the application submission, the FinTech sends its decision on the MSME/SME loan applied for, and if this is an approval, the approved loan amount is transferred to the bank account of the borrower in 2-3 business days.
Types of Business Loans for Manufacturers
An unsecured business loan for manufacturer could be a loan to buy machinery or working capital loan. The latter brings funds to finance day-to-day operations and for maintaining the current assets of the company at a higher level than the current liabilities.
An organisation can also borrow any amount – from a few lakhs to over a crore – to start a factory at a new location or to add more product lines to the business. In addition to these, FinTech companies can be approached for a loan to buy raw materials used in the production processes.
It is good to mention the exact purpose of the loan while filling the application because that helps to choose a customised loan product at the right rate of interest.
Understanding the Fee for Loan
While looking for loans online and making comparisons among the available options, prospective borrowers often check only the interest rates. Lured by a low interest rate, they also end up signing up for loans that later prove more expensive.
Some lenders do not mention the total fee of their loans clearly on websites and in brochures. It is talked about only in the Terms and Conditions in tiny letters, which is why it gets overlooked by borrowers. In applying for a raw materials/machinery loan, therefore, a manufacturer must also ask upfront about the loan processing fee, loan insurance premium if any, the involved legal cost, documentation fee and any other charge that would eventually drive up the repayment instalments of the loan.
Although the interest rate quoted by a FinTech company appears higher than the heavily advertised ‘low interest rates’, it makes for a better option. This is because in addition to their interest, FinTechs have a low processing fee of no more than 2% of the borrowed amount, and they do not levy additional charges such as insurance and documentation fee. A FinTech company can afford to do away with such amounts because most of its processes from application to loan disbursal are conducted online.
Ease of Repayment
Bank loans and funds lent by other conventional sources are usually paid in equated monthly instalments (EMIs). However, at times business borrowers including manufacturers can afford to pay back their borrowed sum sooner than the predetermined schedule. The flexible repayment options for an unsecured loan provided by a FinTech company make them suitable sources of such funding.
Conclusively, though making the final choice on a loan source is the prerogative of the borrower, the multiple benefits of unsecured loans put them in a more favourable position than secured loans. Why indeed would anyone want to bring in additional documentation and hypothecate their business assets when credit on easier terms is available from an alternative lender?
In the business of manufacturing, and particularly in the production of perishable items such as eatables that are usually undertaken by SMEs, time is money. Buying of machinery and required raw materials cannot be delayed even if the general cash flow is reduced at any point in time. The gap in cash reserves can be filled by an instant, unsecured loan.
At Capital Float, we have designed an array of unsecured loan products to suit the needs of manufacturers and other businesses. If you have felt the need to inject more funds into your operations, feel free to contact us for the financing that will serve your interests.
Our customer service reps will also answer any of your queries pertaining to your loan application.
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Oct 24, 2018
Since his appointment last year, Raghuram Rajan has been making the headlines for all the right reasons. But beyond his interventions in currency markets and the macroeconomy, a steady stream of pronouncements from the RBI Governor on potential priority sector reforms should give the SME sector in India much to cheer about.
In his inaugural address, Rajan specifically highlighted the importance of SME finance in spurring growth across the broader economy:
As the central bank of a developing country, we have additional tools to generate growth – we can accelerate financial development and inclusion. Rural areas, especially our villages, as well as small and medium industries across the country, have been important engines of growth even as large company growth has slowed…
He went on to endorse receivables financing as a key policy tool to unlock timely credit to SMEs and address the massive working capital gap in the sector today:
For small and medium firms, we intend to facilitate Electronic Bill Factoring Exchanges, whereby MSME bills against large companies can be accepted electronically and auctioned so that MSMEs are paid promptly. This was a proposal in the report of my Committee on Financial Sector reforms in 2008, and I intend to see it carried out.
On a cautionary note, it is worth noting that this is not the first formal RBI pronouncement in recent times advocating factoring or receivables-based financing as a financial inclusion tool for the SME sector. In fact, the RBI has signaled a steady commitment in recent times to SME credit growth, but its policy directives have frequently not translated into real priorities for public and private sector banks operating on the ground.
In 2013, IFMR reported that 16 out of 26 public sector banks had failed to meet their priority-sector lending (PSL) targets. Half the private sector banks also did not reach their targets, bringing the total shortfall in priority-sector lending in 2013 to USD 28 billion.
Despite these hiccups, Mr. Rajan’s strong words and visible proactivity since coming into office suggest that the RBI may embarking on a fresh chapter of promoting innovation to further financial inclusion for priority sectors. If recent sentiment across capital markets is any indication to go by, the consensus is that this Governor means business. This is good news for innovators trying to bring new and disruptive business models to sectors that have traditionally been starved for credit. But for entrepreneurs in these sectors, it could mean something more transformative – unprecedented access to an entirely new set of institutions, tools, and financial products more finely attuned to serving their business requirements and financing needs.
(Image credit: Business Today Aug 12, 2013)
Oct 24, 2018
Many start-ups are launched, propelled by a brilliant idea, but often face tough times due to inadequate funds. The first impulse is to turn to banks, which, however, usually refuse requests for a loan for business without security. They also ask for plenty of documents to corroborate the need for the grant and the purpose that it will be used for.
A parallel source of finance for small businesses come in the form of non-banking financial companies (NBFCs). Traditional NBFCs offer loans on terms similar to banks, but they do not hold a banking license. In addition, unlike banks, they cannot accept deposits from public. Other than loans and credit facilities, they can offer retirement planning schemes, money market instruments and underwriting activities.
While small and medium enterprises (SMEs) have been turning to banks and NBFCs to get loans, the long-drawn process from application submission to disbursal of funds is still a deterrent for many. After the financial crisis of 2008, there was an even greater need for reliable sources of business finance. Interestingly, the digital technology that gave rise to online banking and e-commerce was also progressing at a fast pace in the same period. This helped to create a new segment of NBFCs in the form of financial technology, known as FinTech companies.
With the aid of complex analytic tools, FinTech companies evaluate credit risk by using an array of customer data, including their digital footprint on social media, e-commerce platforms, smartphone usage and geo-location.
How are business loans by FinTech lenders more convenient than traditional loans for borrowers?
Conventional NBFCs do not usually have a human-centric approach to lending. The lengthy and cumbersome process of applying for business finance that requires piles of physical documents tires out borrowers. Young entrepreneurs who are eager to expand their operations and are confident about returns on their investment cannot afford to wait for long. Also, delays in work can also harm their long-term business interests. They need an alternative source of funds that can cater to their needs more actively.
What draws the digitally perceptive entrepreneurs to a FinTech company is its ability to offer quick loans at competitive rates of interest. Such companies have a holistic approach towards risk assessment and do not ask for heaps of paper-based documents before they start considering an approval for the loan. The basic files needed to check the creditworthiness of the borrower can be uploaded on the encrypted portals of FinTechs.
The advanced machine learning algorithms that these lending platforms employ read through information such as the net earnings of a business, the educational and professional qualification of its owners, the location from which the business operates and the returns on investment that it drew in the past one year. In comparison to this, a traditional NBFC loan is issued to companies that have been in business for at least 3 to 4 years.
Summarily, the prime reasons for which business borrowers prefer FinTech platforms are:
Simplified application process – Instead of visiting a branch in person, they can apply for the business loans from anywhere and at anytime. As the process is digital, all they need is a reliable Internet connection and the soft copies of minimal documents.
Swift funding – Unlike conventional NBFC loans, the funds from a FinTech corporation do not take long to be approved and disbursed.
No prepayment penalties – To make up for their loss on interest due to early pay-off on the loan, banks as well as most NBFCs charge a percentage of the loan amount as penalty. This is not the case with new-age technology based lending organisations. If a borrower can afford to make complete payment on the loan earlier than its stipulated tenure, there are no extra charges.
No hidden charges – You may on occasions have felt surprised when a bank or NBFC told you that there would be a payment protection “insurance premium” charged on your business loan. In the traditional lending sector, such charges are normal. The lending institutions claim that these help in protecting the monthly loan instalments in case sudden sickness or an accident prevents you from making payments on the loan. FinTech organisations do not include such clauses in their agreements. The funds are granted for business expenses in the short term and are approved based on the ability of the borrower to pay back.
The ability of FinTech firms to trawl the online portals and gather data relevant to the borrower’s paying capacity helps in affording more growth opportunities to start-ups. Many SMEs in India have reasonably strong business models, but they still cannot manage to get funds from banks and traditional NBFCs. This shift towards technology-backed alternatives has been favourable for promising ventures.
At the same time, the conventional lending institutions should also understand that FinTech companies are not a threat to their existence. Both these sectors can collaborate with each other in areas such as customer acquisition, product innovation, analytics, sales enablement and cyber security.
The access to innovation through digital peer-to-peer lenders allows NBFCs and banks to create competitive advantages for their own business.
Customer-centric innovation triggered by FinTechs is here to stay. The possibility of getting a loan for business without security or collateral is real. Open architecture-based wealth management tools, Big Data and online financial advice will continue to help entrepreneurs.
As a digital-age lender in this domain, Capital Float uses proprietary algorithms to inspect large amounts of data and evaluate a potential business borrower’s creditworthiness. We offer timely business finance without collateral to SMEs, start-ups, and freelancers to help them bear the expenses that are crucial for their stability and growth in the business world. Our process of judging the payment capacity of businesses is automated, fast and flexible, while also being diligent. If you need loans in less than a week and do not have a very long history in your industry, do not let any refusal from traditional NBFCs discourage you. Visit www.capitalfloat.com to find the business loan best suitable to you.
Oct 24, 2018