All You Need to Know about Business Loans for Manufacturers: Must-Read for SMEs and MSMEs

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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Features of Pay Later: A collateral free loan with multiple drawdowns

Pay Later is a unique loan product that was conceptualized and created by Capital Float, keeping in mind specific needs of Indian SMEs. This product is exclusively available at Capital Float. With Pay Later, a borrower is given a predefined credit limit, post which the borrower can make multiple draw-downs from the approved limit. The limit is reinstated upon repayment by the borrower. Interest is charged only on the amount utilized and not on the entire limit. These amounts can be used to make payments to suppliers. Click here to read more about this innovative product.

Pay Later: Features

1) Flexible draw-downs

You’re never obligated to utilize the entire credit limit in one go. In fact, you can always utilize a portion of the total amount sanctioned at any given point in time. To help you monitor your transactions, we recommend that you use our mobile app and manage your repayments accordingly. The mobile app keeps you updated about the draw-downs created and the limit currently available to you. More importantly, this loan amount is not consumed at once, but is a repetitive credit facility which can be used multiple times. The cycle of draw-downs, replenish and reset continues as often as you want it to.

For instance, if you have been assigned 1 lakh rupees with Pay Later, you can make up to 4 draw-downs of 25,000 rupees each and use these funds to make payments as and when necessary. By repaying the amount used, you immediately reset the credit balance, enabling the usage of funds once again. This leads to a rolling balance of funds that can be used and replenished as per requirement, giving the businessman the agility to do business unlike ever before.

2) Interest applicable only upon draw-down

Traditional loans levy a fixed interest on the entire amount sanctioned. With Pay Later, you’re required to pay interest only for the amount utilized. This means that the pre-defined interest rate is applicable only on the portion consumed and not the entire limit.

For example, if you’ve used only 25% of your credit limit, then you will be charged interest on the 25% used and not the entire credit limit.

3) Payments to distributors/suppliers at the click of a button

You can make payments with just a few taps on your smartphone via Capital Float’s convenient mobile app. You can download this app from the Play Store and the App Store for free. Upon downloading the app, you can login using your username and password. These details are provided to you at the time of your loan application. Following the login, the home screen would show you the credit limit assigned to you. Then on, you can create tranches based on the payments you need to make. Whenever you make a payment request, all you need to do, is take a photograph of the invoice with your mobile phone and upload it onto the app to avail funding.  Within 24 hours, the vendor receives the payment that you requested.

4) Convenient repayment at the end of 30/60/90-day loan term

Instead of a conventional EMI plan that may burden you at the end of every month, Pay Later allows you to choose the repayment duration as per your business cash flows. Our easy, flexible plans work in accordance with your bullet repayments at the end of 30/60/90 days, so that you’re never bogged down by hefty monthly installments.

5) Zero collateral

Pay Later is a collateral-free credit product, meaning you don’t need to mortgage your property, business or personal assets, etc. to apply for the loan. All you need to do is submit the necessary documentation and choose repayment terms that are most suitable to your business. Click here to know more about the documentation required and the eligibility criteria.

Related: How to Get Collateral Free SME Loans for Your Business in India

6) Quick, hassle-free online application procedure

Traditional financial institutions take up to 8-12 weeks to disburse a loan. Additionally, the tedious procedures involved can burden the SME and slow down business responsiveness to opportunities. This is where Pay Later comes to your rescue. A mere 10 minutes is all it takes to fill out the online application form and to submit the necessary documentation. Through our data-driven competencies, we assess your eligibility and offer you a customized line of credit within 72 hours.

7) Get credit of up to Rs. 25 Lacs

With Pay Later, you are eligible for credit of up to Rs. 25 lakhs, which ensures that you’re never short on funds when you have to respond to a lucrative business opportunity. The exclusive facility of multiple drawdowns provides you with a higher access to working capital. By replenishing your credit limit, you can access the funds in real-time. This boosts your ability to do business leading to higher revenue.

Take your business to the next level by choosing Pay Later! Click here to get started.

Watch this video to experience the success story of Mohammad Ali Zeeshan, a travel agent who expanded his business by using Capital Float’s ‘Pay Later’.

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Budget 2021 – Let’s Ideate

“Send me your inputs so that we can see a Budget which is a Budget like never before, in a way. 100 years of India wouldn’t have seen a Budget being made post-pandemic like this. And that is not going to be possible unless I get your inputs and wish list, clear observation of what has put you through the challenge… Without that, it is impossible for me to draft something which is going to be that Budget like never before” – Hon’ble Finance Minister of India.

In the spirit of the aforementioned words of the Hon’ble Finance Minister, this article attempts to deliberate on certain aspects of the tax law, and how certain changes may help the respective classes of taxpayers and businesses concerned.

1. Liberalization of the scheme for voluntary declaration of unaccounted income
At present, the effective tax rate for declaring unaccounted income voluntarily in your income tax return is 78%. The very thought of losing 78% of the fortune deters such declarations. Can this regime be replaced with an effective tax rate of about 35% on declared unaccounted income coupled with a compulsory deposit of 40% of the declared amount in 15-year bonds? In such a case, the declarant gets to keep 65% of their declared amount though they get 40% back in their hands after 15 years. The government can allow banks to issue these 15-year bonds and use the money for credit expansion at low rates of interest to boost the economy.

2. Cashback to the final consumer a portion of GST paid if the purchase is through cashless means
An incentive like this from the government for a limited duration will encourage people to increase their purchases, thereby boosting the consumption demand and subsequently, the economy. Cashback to the final consumer will be more effective than cutting the GST rates as oftentimes rate cuts are not passed on by businesses. The Government may consider adding an additional condition that only “Made In India” products be eligible for cashbacks.

3. Discussion points arising out of Covid-19
Many individuals have got stuck in India due to travel restrictions, necessitating stay with family in India while working for foreign employers. The government released a clarification in May 2020 excluding the period between 22 March 2020 and 31 March 2020, while determining the residential status for FY 2019-20. Similar clarification is expected for FY 2020-21 as well since a change in residential status may result in increased tax liability for some individuals who have been forced to stay in India.

Furthermore, the Government may also consider providing additional tax deductions for expenses incurred on Covid-19 tests and treatment in private hospitals, which is a need of the hour.

4. Measures for easing the cash flow burden
Relaxation of advance tax norms with respect to Dividend income
India has moved to the traditional system of taxation of dividend, whereby the shareholder pays tax on the dividend income as compared to the company paying tax on such dividend declared, which was previously the case. Thus, it may be beneficial for the advance tax provisions to be amended suitably to provide relaxation from levy of interest if the shortfall in payment of advance tax is attributable to under-estimation of the dividend income.

Enhance the scope to apply for lower tax collection certificate
The scope of Tax Collected at Source (TCS) has been widened to cover the sale of motor vehicles, remittance of foreign currency under LRS or sale of an overseas tour package and sale of goods. This has resulted in persons covered by the said TCS provisions paying something more (in the form of TCS) at the time of purchasing goods or vehicles or making foreign remittances, as the case may be. A budget proposal enabling such persons (if their estimated tax liability justifies collection of tax at a lower rate) to apply for a lower tax collection certificate would go a long way in easing the crunch in cash flow resulting from an increase in cash outflow on account of TCS at the time of purchase.

With the promise of a Budget like never before, the nation waits in anticipation for the clock to strike 11 on the morning of 1st February 2021 – the date and time when the Budget speech will be delivered!

The author Rishi Dabrai can be reached at ndjandassociates@gmail.com or at +919945236982

Rishi Dabrai
Chartered Accountant
Partner, NDJ & Associates

“DISCLAIMER: The views expressed are solely based on the opinion of the author and Capital Float (CapFloat Financial Services Pvt Ltd) does not necessarily endorse or subscribe to it. Capital Float (CapFloat Financial Services Pvt Ltd) shall not be liable for any loss/damage caused to any person/organization directly or indirectly. Capital Float does not guarantee the contents of the views expressed and the same are not binding on Capital Float.”

Oct 24, 2018