In the past ten years, India has seen a growth in the number of start-ups coming forward to offer customised solutions in the fields of education, hospitality, travel, transport, healthcare, entertainment, marketing, e-commerce, waste management and consulting. Most of them, however, start with modest funds. They also deal with the challenges of validating their R&D, finding profitable markets and managing office administration costs and overheads.
It is also a common for small and medium enterprises (SMEs) in the service segment to experience their initial expenses being higher than their revenue.
Another problem encountered frequently is that while a business may be prompt at paying the bills raised by its suppliers and utility companies, it may not have customers who pay on time. Even though Accounts Receivable is an asset for any organisation, it gets converted into cash only at a later date. How then should such a business fund its current expenses and keep fuelling its operations? The answer lies in an SME loan, which is the best resort at this point.
Taking an SME or MSME loan is also a wise decision for an enterprise that has planned its next step towards growth or wants to invest some funds immediately in utilising a new business opportunity.
What kinds of loans are available in the market?
The service industry has numerous sub-domains, and a business loan for service company are provided by banks and non-banking finance companies (NBFCs).
The potent ability of digital NBFCs to offer unsecured business loans have made them a competitive source of finance for micro, small and medium enterprises. With a lending model facilitated by digital technology, these companies are also known as FinTechs, and they offer bespoke credit products for organisations providing professional solutions.
Your business loan for service company could be a working capital loan, invoice finance, credit for expanding the business or any other tailored loan for professional services.
A Working capital loan is usually taken to fund the daily operations and cover expenses such as wages, purchase of equipment or to manage entries on accounts payable. These are short-term loans that help businesses to stay focused on their growth.
Similar to a merchant cash advance, invoice finance is another popular SME loan where the lender advances money against the unpaid account receivables of the borrowing business. If you have raised bills to some of your clients, and they are yet to be paid, you can use the same to get a loan from a FinTech company.
Loans can also be used for business expansion and opening new branch offices or shops. Doctors who wish to start more prominent clinics, retailers who want to add more shelves in their shop or to purchase the adjoining premises to expand, and other entities that seek a business loan for service company growth can approach a FinTech lender for quick funds.
Can these NBFCs provide adequate amounts to suit your requirements?
A loan application requires you to state the purpose of the funds. It is good to have a precise idea of the amount to fulfil such business needs, and for this, you should check the exact market costs of the assets that you plan to buy with the borrowed amount.
As an example, if you are taking a working capital loan to buy motorcycles to facilitate the courier delivery services offered by your company, find the price of these vehicles and enter the same amount in your loan application. While there are no rules against requesting a more substantial sum, it is good not to go overboard. This prudence will help you in avoiding higher EMIs.
The amount that you can get on business loan for service company may range from a few lakh rupees to almost a crore. With such a broad scope for funds, the requirements of most SMEs are conveniently met.
How to apply for a business loan: The Process in General
To avail credit from conventional sources, you generally have to visit the lender’s office at least once and discuss the complete procedure. You may be asked to submit multiple photocopies of ID proofs and business financial health documents.
An MSME loan from the digitally operating FinTech company, however, is availed on much easier terms.
While the eligibility criterion differs from loan to loan, it is accommodating enough to include a high number of businesses. FinTechs only need to be sure of the repaying abilities of their borrowers, for which they ask for at least one year of successful operational history.
Owners of any Pvt Ltd, Prop, or LLP (limited liability partnership) company can check their eligibility and apply for their business loan online. They merely need to visit the website of the FinTech lender and fill in the application digitally. Remember that the portal of a genuine lender will be encrypted with a valid security certificate, and the URL will start with an ‘https’ prefix.
Since it is a digitized process, the upload of soft copies of documents is enough to verify the authenticity and eligibility of business for the funds. Among other things, the latest copy of tax returns may also be required.
It does not take long to know the status of your application. You will learn of the lender’s decision in minutes, and for every approved loan application, the amount is disbursed in 2-3 working days. It is deposited directly in the business bank account.
Loan costs and repayment
FinTech loans are offered without hidden overhead charges such as legal fee, loan insurance premium, documentation charge, commitment fee and other miscellaneous dues.
This implies that you only pay interest and a nominal loan processing fee along with the principal in your EMIs. Additionally, the terms of repayment are flexible, and instalments can be varied as per your business earnings.
While availing of a loan to solving cash crunch, SMEs can finance their business strategies without hypothecating any valuable asset to a lender.
Capital Float has adopted a digitally refined lending framework to enable the growing number of SMEs in India to easily procure the funds they need for their ambitious plans. As an online platform offering funds for various business requirements, we have trimmed the formal loan issuing process to make it stress-free and quick for businesses.
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To get more information on loans for specific business types, please visit our website or call us at 1860 419 0999.
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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
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 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.
Oct 24, 2018
The Internal Rate of Return (IRR) is one of the most universal return concepts, and rightly so because of its effectiveness in interpreting returns from an investment. However, it is also one of the most difficult concepts to wrap your head around. In my personal opinion, the difficulty arises primarily due to the understanding of the fundamental underpinnings of the definition. It is not my intention to turn this discussion into a technical one; since the objective is to demystify, I will break it down for simpler understanding.
Firstly, the IRR is better understood when used to compare returns from two or more investments. The decision rule is rather simple – the higher the IRR, the better. The confusion arises when investors look at the IRR in isolation i.e. an investment yields a 20% IRR so what does that mean? The answer is a complicated one and often leads to more questions.
Secondly, the IRR is a multi-period return measure. What this means is that when investors would like to compare investments that span different time periods, IRR becomes the best tool for this purpose. For instance, investment A returns 20% in X years whereas investment B returns 25% in Y years. The question as to which investment performs better is best answered by the IRR.
Thirdly, the IRR works best when investments have conventional cash flows patterns i.e. a negative cash flow followed by multiple positive cash flows. Any variations herein are bound to be detrimental to the IRR calculation. For instance, you buy a stock (negative cash flow) and receive dividends (positive cash flow) during the holding period. The IRR works well in this scenario. However, if you short a stock (positive cash flow) and buy another one (negative cash flow) with the proceeds and finally square of the transaction (positive or negative cash flow) later on, the IRR may not necessarily yield desired results.
Lastly, due to its very definition, in some instances an investment may have no IRR at all or at least one that can be determined! Obviously, in such instances, the IRR is of no use and creates confusion in the mind of the investor. Therefore, the challenges in interpreting IRR arise when investors use the IRR for purposes other than those mentioned above.
Although this list is by no means exhaustive, it captures the salient features of the IRR. Hope this piece has helped simplify the concept and gives you confidence to seamlessly compare investments using IRR.
|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