What is a Business Loan? How to Apply for It?

A start-up that takes off well with its business idea gradually strategizes about other plans to cement its growth. However, despite a fair degree of success, these small and medium enterprises (SMEs) can face a shortage of funds to fuel their progress.

The business revenue that helps to pay employees, purchase raw materials, maintain the premises, meet other expenses and even make profits may not be enough to invest in further growth. Fortunately, there are business loans that come to the rescue of enterprising organisations at this time. These are provided by banks, non-banking finance companies (NBFCs) and private money lenders.

This article answers some of the frequently asked questions (FAQs) on unsecured and fast business loans offered by NBFCS with a digital lending model. They are also referred to as FinTech companies and are being increasingly approached by startups who find their lending policies more flexible than those of conventional sources.

What is a business loan?

A business loan is a form of financial support that helps commercial organisations to keep up with their growth plans. It is particularly valuable for micro, small and medium enterprises that start their operations with a low level of funds and may not have a substantial amount of funds to invest in bigger initiatives. These include the purchase of new machinery/equipment, adding more product lines, upgrading product features, starting the business at a new location or any other activity that will improve and develop the enterprise.

Is it really a good idea to take a business loan? Won’t it be an additional burden in books of accounts?

Any loan is a liability in accounts. However, when a business takes credit for productive purposes, it can also afford to pay it back with the revenue generated by intelligently channelizing the funds. When there is an attractive business opportunity, and it merely needs some financial investment, the required funds can materialize in the form of fast business loans offered by a FinTech lending company.

If the business procrastinates, the amount required in investment may increase with time, or the opportunity may completely vanish. It is, therefore, better to borrow the funds from an institutional lender and take advantage of the opportunity when it is available.

Thanks to the flexible repayment policies of FinTech lenders, the debt can be cleared before the scheduled term of the loan.

How to apply for a business loan? Does an MSME need anything, in particular, to apply for these funds?

Applying for a loan at a Fintech lender is a simple process that takes less than 10 minutes. The application is available online and asks for basic information of the and the enterprise in question. An MSME should have been operating in its industry for at least one year to be an eligible borrower.

The details provided in the digital application need to be substantiated with corresponding documents. This stipulation, however, does not require the borrowers to send any printed copies of the papers to the lender’s office. They only need to scan the necessary documents and upload them as PDFs with the application.

What are the documents required for a business loan application?

A FinTech lender typically asks for minimum possible documentation. It simply wants to verify the credentials of the prospective borrower and make sure that the business has been operating in conformity with the tax regulations and statutory laws of the country. Generally, the required paperwork include:

  • Photo IDs and KYC documents of the business owners
  • Latest ITR/GST returns
  • Business bank account statements for the last six months to one year

The loans provided by a FinTech company are often tailored based on the amount approved, the term of the loan and the purpose of the loan. At times, borrowers may be required to submit a few additional documents . They can find answers to queries such as ‘how to apply for working capital loan’ or ‘how to apply for machinery loan’ on the company’s website. For more details, they can call the customer service team and get the exact list of documents pertaining to their loan.

How long does it take for a business loan to be approved?

In addition to ‘how to apply for business loan’, a frequently asked question on this subject relates to the time within which the finance is available for use.

It usually takes between 1-6 weeks to get a business loan from private and public sector banks, while it only takes three days when such funding is availed from a Fintech lender. Due to the digitized application and document submission system, it does not take long to review the details and provide a decision on the requested funds. For every approved application, the money is deposited in the business bank account within 2-3 business days.

How much loan can a business get from a FinTech lender?

This depends on the individual requirements and the purpose of the loan. While the range of available credit from a FinTech lender can start from five lakhs and go up to a crore, it is recommended that the borrowers have a near-precise idea of the sum that will help them to fulfil their requirement.

Some businesses apply for only a part of the total required sum and make the remaining investment from their savings. Keeping the loan amount on the lower side is a sound way to avoid paying unnecessary interest. Similarly, borrowing a lower amount may result in the SME falling short of funds at a later stage. SMEs must evaluate their credit needs as closely as possible while applying for a loan.

Nevertheless, FinTech lenders do not turn down requests for ‘big amounts’ once they have verified the earning capacity of a business and are confident that the borrower would not default on repayments.

A FinTech company may also offer an eligibility calculator to help the potential borrowers calculate the maximum amounts they can borrow. Such a calculator takes business earnings, expenses and its operational history into account to compute the borrowable funds. Capital Float understands the anxiety of a business that wonders ‘how to apply for business loan without collateral’? We know that many SMEs are unable to get the loan they deserve due to lack of financial assets to pledge as collateral. This is why we offer only unsecured business loans.

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Your enterprise qualifies for our funding if it has a minimum operational history of one year, has been earning reasonable revenue throughout its tenure, has a sound credit history and is compliant with the laws of the land. To know more about fast business loans and for queries on any specific working capital loan, please call us at 1860 419 0999. You can also meet us in person by scheduling an appointment.

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5 Things to Know About Short Term Business Loans

If you are planning to embark on a new venture or are already running an enterprise, knowing all about short-term loans will serve you well.

Money plays a crucial role in your entrepreneurial journey, determining the size and scope of your business. After all, when you are brimming with ideas to cater to a market need, the last thing you want on your hands is a financial concern that could result in a compromised business opportunity.

Fortunately every problem has a solution and financial solutions for businesses come in many forms.

Reach out to experts

Should you require commercial finance, a short-term business loan could prove to be immensely useful. Wondering what exactly short-term loans are? You could ask friends who have applied for one, or approach specialized financial companies like us. You would be better placed to know more about short term business loans before applying for one. This is particularly useful if you are venturing into business for the first time as a small entrepreneur.

What is a short-term loan?

The simplest way to understand the concept of a short-term loan is to think of it as a business loan that provides immediate working capital to your company. You are given a lump sum amount that you have to repay within a period of one year, or up to five years at most. This is in contrast to other loans which can be repaid over a longer term.

Financial experts say that a short term business loans hold the potential of making or breaking your company. As per a study, conducted by the National Small Business Association, 19% of small business owners cite lack of available capital as the major challenge in their growth, and 82% of businesses fail due to improper management of cash flow.

Given its importance to small businesses, let’s take a quick look at the implications of a short-term business loan.

Factors to keep in mind

Short-term loans are easier to obtain as compared to long-term loans. You can avail of them in the alternative finance market through online lenders, and thus you can completely bypass the slow and cumbersome conventional lenders like banks. These loans are less tedious to get as they have a shorter list of qualifications and lesser paperwork. But you also need to repay them faster, usually within a year. If you manage to raise your profitability in the short term, this can be comfortably achieved.

However, there are certain points that you need to keep in mind while applying for a short-term loan. The interest rates of short-term loans are relatively higher in the commercial finance segment. Thus, it’s advisable for you to go through and understand the total cost of the loan before applying for it. Short-term loans often demand frequent payments from you. In case you don’t have regular/stable cash flow, you may find it difficult to repay your loan with weekly payments.

To help you further, here are five things you should know before applying for a short-term loan.

  1. Be clear about the purpose: Having a clear purpose is the pre-requisite for exploring a short-term business loan. It’s of utmost importance to be crystal clear as to the purpose of the loan—to hire new talent, expand your supplier network, invest in technology etc. If the purpose is not clear, the loan amount could well be frittered away on incidental expenses that can hold back the progress of young companies. Analyze in detail if the short-term loan is going to work for you in your current situation.
  2. Have an operational plan: Have a clear business strategy in place before securing a loan from a financier. It’s crucial to have a strategy that optimizes your resources. Without a proper business plan/strategy, it’s likely that you are going to find yourself in a debt-trap.
  3. Research interest rates and overall cost: Interest rates are an important part of any loan. It’s a smart move to know the interest rates on your dream loan early on, along with the other charges/fees that your lender may levy. A fee would not cause an increase in your interest rate, but it will be a part of your monthly payments.
  4. Calculate risks: As a wise entrepreneur, it is crucial that you carefully weigh all the possible risks before arriving at any decision. Analyze and ask yourself questions like: Will this loan help me in reaping the benefits? Will it generate regular cash flow? Will I be able to repay my loan in regular weekly or monthly payments?
  5. Know your loan duration: Apart from calculating all the risks, and having the strategy in place, it is important to know the duration of your loan and to choose the repayment tenure wisely. You can choose a slightly extended period, keeping risks and emergencies in mind, instead of choosing a short tenure.

Take a leap of faith

We understand that the journey of any venture, especially of a small business, is not an easy one. It takes a lot to take your business to a certain level and when issues like finances become a hindrance, one is likely to lose hope. But remember, today’s new age financial solutions offer a timely respite. Yet, you need to have an analytical and calculative mind, which can understand the pros and cons of the loan in order to leverage it fully.

If you are still in a dilemma, wondering how to get loan for your business or are unable to decide if a short-term business loan suits you or not, we, at Capital Float would be more than happy to assist you.

Oct 24, 2018

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Considerations While Applying For a Business Loan at a Financial Institution

New entrepreneurs with pioneering business ideas primarily need finance to keep their operations running. Banks have encouraged the growth of small-scale industries in India since independence by granting loans to promising ventures. However, the demand for funds did not quite keep up with the supply, and this resulted in the emergence of non-banking finance companies (NBFCs). The NBFCs supported the trend of industrialisation by granting business finance to those who could not procure it from banks.

The digital technology revolution in the second decade of the 21st century has given rise to a new breed of NBFC companies – the FinTech (financial technology) lenders. Employing a new models of lending, a FinTech company uses data analytics and social media tools to evaluate the creditworthiness of borrowers.

If you have begun a new venture and are seeking a loan for business expansion, you may have wondered who will be a more suitable lender – a bank or a digital NBFC. While there is more of interdependence than competition between these two sectors, you as the borrower have the privilege to choose what suits your interests the best. The loan that are you are eligible for will also be based on your business credit history and the availability of documents in support of the application.

Mentioned below are the points that will matter in the decision-making process:

Flexibility of sending application: At present, banks in India do not work on Sundays, second and fourth Saturdays and on gazetted holidays. Because you need to visit a bank branch in person while applying for business finance, it implies that there will be days when you cannot expect the process to advance towards the disbursal of your loan. Conversely, digital NBFCs by their very nature of operational medium can be accessed for business finance any day, any time. Therefore, Even if you are completely occupied with work on week days, you can apply for the business loan on a Saturday or Sunday and can still avail the loan within a time period as short as 3 days.

Loan processing time: Usually, it takes a few weeks before you actually get the required credit through a bank loan. Most of the banks in the public sector have to follow stringent rules in verifying the credibility of business organisations before they release funds into their accounts.

If you have an urgent need for money and cannot afford to wait for long, an NBFC loan from a FinTech player will be a better option. The entire line of processes from the submission of application to the disbursal of funds is digital and is therefore far quicker.

Collateral requirement: For years, banks have been lending to both individuals and businesses based on collateral that has to be pledged for security. This could be a residential or commercial property, gold holdings or any other asset that can be liquidated in case the borrower is unable to pay off the loan in the stipulated period. Even if a public sector bank looks at the regular income earnings of the borrower, it still requires collateral for additional assurance of getting back the amount lent with interest.

On the other hand, the NBFCs in digital lending industry do not ask for such guarantees through assets. They offer their loans solely on the creditworthiness of the business, which is evaluated by its dealings in the past and expertise in the field. If you are reluctant to offer collateral or simply do not have anything substantial to pledge, a FinTech company will still be willing to grant business loans in India.

Years in business: When was your business established? How old is your venture? For how many years has your business been up and running? Traditional lending institutions like banks ordinarily ask such questions when you apply for a loan through them. Generally, banks in public and private sector lend to organisations that have been operational for 3 to 5 years. Even conventional NBFCs require about the same duration before they can approve an application for a business loan. Such conditions however cannot be fulfilled by many start-ups.

The digital NBFCs have come to the rescue of enterprising individuals by granting loan for business even if their establishment has just completed a minimum operational period A one-year-old organisation with a convincing success story can persuade a FinTech company for business finance.

Nature of operations: Digital technology and social media have given rise to enterprises that were unheard of even in the late 20th century. Online platforms today sell everything from groceries and clothes to jewellery and appliances. Tickets for airlines, rail, buses and even tables in restaurants & hotel rooms are booked with a few taps on your smartphone. There are hundreds of other great business ideas that need to be uncovered. Banks and other traditional lending agencies have not yet started offering credit in full-faith to ventures of an unconventional nature.

The good news is that digital NBFCs are willing to support this generation of businesses. The FinTech industry has been increasingly lending to e-commerce companies, digital marketing organisations and other projects that use technology innovatively. Thus, all of this encourages progress and allows talented entrepreneurs to contribute to the Make in India initiative.

Prepayment penalties: Nobody wants to be debt-ridden. When you take a personal or business loan, you also wish to pay it back as soon as possible. However, the lending policies of traditional sources of finance in India have been such that borrowers are penalised if they repay early. The banks earn through interest paid each month, and to maximise this, they grant loans for longer tenures. If you have windfall gains in business and want to pay off your debt early, you may be charged at least 5% of the loan amount as penalty. That may be quite disappointing for an astute businessperson.

The new-age NBFCs have eliminated this trouble. There are no preclosure penalties when you get business loan from a digitally operating FinTech lender. What is more, their flexible repayment options give you the liberty to pay without straining your business operations or affecting your personal funds.

If the case for borrowing from a FinTech company looks convincing and positive, you can be the next business to get a loan from Capital Float. With a set of thoughtfully segregated loan products, we will be happy to support your business in its journey towards higher levels of growth. To know more about how the online NBFC business loans in India can help you, visit our website www.capitalfloat.com.

Oct 24, 2018

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The SME Lending Puzzle: Why Banks Fall Short

Let us consider the following hypothetical scenario:

ABC & Co., a small services firm, began operations in mid-2011. It reported a 40% jump in annual turnover from Rs. 5 Cr in FY 2012 to Rs. 7 Cr in FY 2013. As a startup, the company has not yet broken even and reported losses for consecutive years. The promoter is well educated, previously worked in organizations of repute for over a decade before deciding to float this venture. The short-term finance requirement of ABC & Co is about Rs. 40 lac for 90 days, but does not have any physical collateral to offer as security. At this stage, the promoter of ABC & Co. decides to approach banks and NBFCs in the market to fund this debt gap.

What would this promoter’s experience be in today’s scenario? Would he be successful in securing the necessary funds?

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According to a recent statistic, 33% of companies operating in the Micro, Small and Medium Enterprises sector have access to banks and financial institutions, while the rest remain excluded and are compelled to raise money through informal channels.

This debt gap is alarming especially in the backdrop of the fact that SME segment contributes nearly 10 percent of the country’s gross domestic product and 45% of all industrial output.

Till date, banks and NBFCs have not been able to finance this debt gap effectively. What has prevented or restricted them from profitably penetrating this sector? Is it due to inherent credit risk in the segment, lack of collateral, government regulation and laws, or simply because there are greener pastures elsewhere to lend money?

Lets us understand the debt requirement of the SME segment (both early-stage as well as mature entities) before we try to further dissect this issue. In our example, ABC & Co. could require financing for primarily two reasons:

1) Capex, i.e. medium to long-term finance for business expansion, product diversification, renovation of business premises, or purchase of machinery.

2) Working Capital i.e. to cover short-term immediate cash flow needs arising from day-to-day business operations.

To cater to this demand, banks and financial institutions already have specific products (both fund and non-fund based) that can be broadly categorized into two categories for the sake of simplicity:

1) Simple lending products, which would typically cater to the first requirement of SMEs for Capex. These are medium to long-term financing products in the form of equipment and machinery loans, high yield unsecured business loans, Loan against Property etc.

2) Specialised lending products, which typically include factoring, trade finance, cash management services, project finance, bank guarantee, or letters of credit, which typically cater to the second requirement of working capital finance.

As is evident from the above, it is not the lack of “products” that explains the under-penetration of finance flowing to the SME sector. Rather, it is in the design, applicability and administration of these products to the SME sector that banks have fallen short.

In an effort to go deeper, we can identify four key reasons among others, for this shortfall:

1)  Sole Focus on Financials: The current approach to SME lending in most institutions is still heavily dependent on business financials- i.e. looking at historical data to predict future creditworthiness. Typically this involves a lot of paper work and many visits to the applicant.

This approach has not been very successful in the SME sector to-date due to the fact that the financials provided by the applicant are often opaque given the cash nature of business transactions and incentives to under report income to save on taxes. ABC & Co., on this parameter alone (aside from business vintage) would be filtered out as the current financial position reflecting business losses would not be very appealing to most financiers.

2)  Bureau Reporting: There are two kinds of credit bureau reports that can be generated by member banks and NBFCs – Individual and Corporate. While individual records are provided by most bureaus, only CIBIL currently provides reports for corporate entities in India. Valid records for SME entities are still not very evolved in the country. And while the bureaus can provide data on credit worthiness of the individuals involved in any given company, they cannot give relevant insights about an applicant who is a first time borrower.

Since ABC & Co. is newly established, there would not be any bureau record on the company. The application would then have to be judged on the strength of the individual records for the promoter as well as the business viability of ABC & Co.

3)  Selective Segmentation: The implication of the above two factors is that only the “upper layer” of the medium to large enterprise segment is able to pass through banks’ and NBFCs’ credit assessment parameters, leaving aside the major chunk of “small” entrepreneurs and entities whose need for adequate finance is more pronounced. These small entities could be major links in the supply chains of large players, and their inability to access finance could have the ripple effects across the value chain.

4)  Lack of Collateral Security: Lending in India traditionally has relied on taking adequate collateral as a “risk mitigant” to cover the credit risks associated with SME lending and the ambiguity around appraising this segment. The Loan to Value ratio (LTV) becomes the yardstick to segregate and approve or reject cases based on risk. This ratio is inversely proportional to the risk perception of the applicant.

Since ABC & Co. does not have any physical collateral such as property or machinery to offer and the promoter has pitched in whatever money he had in the form of initial capital into the business, his application would be rejected by most banks and NBFCs in the market today.

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This problem of access to finance for SMEs in India is even more accentuated for early-stage companies or startups such as ABC & Co. In their case, past financial performance would be not a correct indicator of the future potential of the enterprise. After initial round of equity funding from family and friends or seed investors, working capital requirements or ad-hoc needs for short term finance would inevitably kick in and must be dealt with in a timely manner to keep the firm operational.

To conclude, traditional lending to the SME sector in India can best be described as a “One Size Fits All Approach.” The risk management techniques used by banks and other financial institutions today are invariably more suitable for medium and large corporate entities. The same set of rules when inadvertently applied to small and early-stage enterprises result in a faulty output, i.e. the systemic rejection of most SME loan applications like ABC & Co. Given the intense nature of competition in the lending industry today, the consequence is that too many banks and financial institutions end up chasing the same set of “good” customers, leaving aside a much larger untapped segment of SMEs in the process.

Watch this space for more articles on the subject as well as suggested ways to underwrite “small” and
“early-stage” entities in the SME sector.

(Image credit: http://blog.directcapital.com/misc/small-business-loan-video/) 

Oct 24, 2018