An organisation planning to apply for a business loan must be thoroughly aware of the general application process and the documents that need to be provided to the lender. Security is a top concern for any business today, and no enterprise will want to give copies of their ID and financial papers to questionable entities.
Even when they choose to borrow from familiar banks, the hassles of printing and photocopying documents, submitting them to a branch personally or through a reliable employee and then awaiting approval of their SME loan can be tedious. It discourages many MSMEs from approaching traditional financial institutions for funds. “How to get fastest business loan” while also following a secure procedure is a priority for SME and MSME borrowers.
Fortunately, the expectation of getting a quick business loan can now be fulfilled by FinTech lenders. These digitally active NBFCs have an abridged and systematic online application process, and funds on approved applications are provided in less than a week. Furthermore, they offer loans without requiring the borrowers to pledge any security.
FinTechs do need some documents to sanction any loan. However, businesses only need to submit the soft copies with their digital application. The primary documents required for an unsecured working capital loan or any other SME/MSME loan include:
KYC Documents of Business Owner(s) – PAN Card, passport copy or a copy of any other Photo ID that is recognised by the Government of India
Income Tax Returns (ITR) – The processed ITR document copies for the last two years
Goods and Service Tax (GST) Returns – Processed returns for the past year
Bank Statements – For the previous six months
For some particular loans taken to finance the operations of schools, medical clinics, restaurants, franchises, logistics companies and e-commerce sites, the FinTech lender may need documents specific to these verticals.
As an example, a Pvt Ltd company or LLP that seeks merchant cash finance based on the payments made through cards should also submit its card settlement statements for three months preceding the loan application. On the other hand, sole proprietors (Prop) running their own shops, salons or small restaurants can directly submit their KYC documents, IT returns, bank statements and papers that corroborate the identity of their business.
What then, about the security factor here? That indeed is important – a business loan application should only be sent from a secure website that encrypts all information loaded on its servers. FinTech companies with website domain having a lock symbol and https:// prefix are authentic lenders in the credit market.
If your business has been successfully running for almost three years, and you have been complying with the tax laws of India, your chances of fulfilling other eligibility requirements for an unsecured business loan by Capital Float are high. Just gather the soft copies of documents relevant to your enterprise, and by spending less than 15 minutes on the digital application, you can send a request for the loan. You will also be notified of the approval on the same day, and the funds reach your bank account in the next 72 hours.
To know more about our loan granting process, feel free to call at 1860 419 0999.
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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?
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.
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
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
Written by Jubin Mehta
Capital Float is a digital finance company that provides working capital loans to underserved small business in India via a technology-led loan origination and credit underwriting platform. The Bangalore based company today announced that it has raised $13 Million in Series A financing to support the company’s rapid growth. The round was led by SAIF Partners and Sequoia Capital, with participation from existing investor Aspada.
Founded in 2013, Capital Float has created a proprietary technology platform to evaluate the financial health of SMEs and efficiently deliver working capital to a segment that is underserved by traditional banks. Businesses can apply online and get funds in less than 7 days (see how it works). The company currently lends to e-commerce merchants, small manufacturers, and B2B service providers across major cities. The company has been founded by Stanford MBAs Sashank Rishyasringa and Gaurav Hinduja and is a registered Non-Banking Finance Company (NBFC). Along with the headquarter in Bangalore, Capital Float has offices in New Delhi and Mumbai.
To date, the Capital Float platform has delivered nearly Rs. 40 Crore in loans to SMEs across 10+ cities in India. The company claims to have achieved record results in 2014 and saw a 10x increase in online applications, particularly in the e-commerce market where it has partnered with leading marketplaces such as Snapdeal, Flipkart, Amazon, PayTM and Myntra to finance small merchants selling online.
This round of funding will help expand Capital Float’s technology, enabling it to scale up nationally and launch new loan products. The company had raised a $4 Million seed round in mid-2014 from Aspada and SAIF, bringing the total capital raised thus far to Rs. 100 Crore in this fiscal.
“We started Capital Float with the belief that technology and data would be the key drivers in cracking SME financing in India,” said co-founders Gaurav Hinduja and Sashank Rishyasringa. “Over the past year, we’ve focused on building the platform to deliver what our customers want above all else – flexible and ultra-convenient access to finance that can scale with their business. By leveraging alternative data in our underwriting model, we are increasingly able to not only make faster decisions but also lend to emerging business models. We are very excited to partner with SAIF, Sequoia, and Aspada, and truly believe that we now have a world-class set of investors to propel us towards this vision.”
News piece sourced from YourStory. Read the full piece here.
Oct 24, 2018