A business loan is an agreement between the borrower and the lender to obtain finance for a specific purpose, at a specific rate, with or without security, to be repaid in a fixed tenure. Once you have assessed your requirements and decide to obtain a business loan, you need to scan the funding options available in the market carefully. You might need to think of the following:
- How to choose a business loan? A business loan should not only make funds available to you at the right time but also fulfil your requirements.
- What can you use as security? You can avail secured as well as unsecured business loans. When the promoter brings in security, it mitigates the risk to a certain extent, and hence reduces the cost of lending.
- How does the application process work? You need to submit your financial statements, tax returns, business licenses, and projections to apply for business loan.
- What is the basis of appraisal and assessment in an SME loan application? It is done based on the credit rating of your business and your personal credit score.
- What are the types of business loans available in the market? There are various types of SME loans available, some of which are discussed briefly below.
1. Term loans: Loans to finance capital expenditure are generally given as term loans, which may vary from 12 to 120 months.
2. Working capital/cash credit: Working Capital or a cash credit limit is for the financing of revenue expenditure of the units and helps finance an enterprise’s day-to-day operations.
3. Asset-backed loan: You can avail this loan against the mortgage of a residential/commercial property.
4. Invoice financing: Invoice financing helps you sail through the time lag between invoice raising and receiving payment from the client by providing up to 80% of the invoice amount.
5. Trade financing: If you are an enterprise doing business with some unknown suppliers, they require assurance of payment before performing any transaction. Therefore, non-fund based limits like the letter of credit and bank guarantees come to your rescue and play a vital role in providing payment assurance to the suppliers.
6. Point-of-sale (POS) overdrafts: Also known as merchant cash advance, this loan comes along with a POS machine, and can be availed against the volume of the transaction generated. The assessment is based on aggregate card swipes and settlement and the loan comes with comparatively lesser processing fees as well as interest rates.
7. Export packing credit: If you are an exporter, you can avail export packing credit, which is a working capital loan for the purchase of raw materials, processing, packing, transportation, and warehousing of goods meant for export.
8. Pre- and post-shipment packing credit: The scheme facilitates import and export trasactions. Manufacturers, as well as merchant exporters, are eligible to avail foreign currency packing credit at internationally competitive interest rates.
Despite the vital role and strategic importance in the context of industrial development and economic growth of the country, several key issues remain to be addressed properly. The SME sector experiences several constraints and challenges. Besides challenges related to inadequate capital and credit facilities, the lack of adequate information to prospective borrowers about various government schemes/bank’s loan products and their benefits are challenges that constrain the growth of MSMEs in our country.
Empowering yourself with information on loan products can help to reduce the credit gap as well as impact profitability.
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