Starting your own business or trying to grow a new one from scratch is hard work. One’s effort, time and money is fully invested in making the business a success. The biggest hurdle though that most business face is the availability of working capital in the initial months. After investing in technology or office space, the business owner also has to ensure that he has enough liquidity to support his inventory and pay his employees without a delay. Before the business starts reaping revenue the business owner must pay his employees, suppliers and vendors, and should also reinvest for growth. All these activities are a handful and in return no guarantee is there for the success of the venture.
Lenders all over the world have understood that lack of cash flow in the initial months of a business can cripple the venture. Employee payments will be irregular, vendors might get turned-off and timely marketing initiatives will be limited. This in effect will dampen the sales of the business and money that the sales will generate. So a working capital difficulty directly can affect the performance of the business in its initial phases. Moreover, many entrepreneurs might also end up make strategically wrong decisions due to the lack of capital. Due to shortage of working capital, a business owner may fail to meet the inventory requirement for a big order which in turn could have been a fortune changer in the long run. Lenders are trying to do their part by providing collateral free loans up to INR 25,00,000 to entrepreneurs to help them get through the initial phase in their respective businesses meet inventory requirements, pay the employees and vendors and spend on marketing initiatives.
Features and Types of Business Loans
The common features of Business Loans are
- Collateral Free working Capital Loan. No Guarantors required.
- Overdraft limit usually in the range of 2-35 Lacs.Maximum Loan amount ~ 50 Lacs
- Interest is usuaaly charged on the outstanding amount of the overdraft
- The maximum tenure of business loans usually is around 5 years (flexible)
- Avail this loan at fixed interest rate
Most lenders provide business loans of different types and for different tenure too. The common business loans are usually in the range of INR 5lacs to 35 Lacs and have a flexible pay-back schedule. Broadly, there are 4 types of business loans that one can apply for:
- Property Term Loan
- Plant and Machinery Loan
- Medical Equipment Tool
- Working Capital Business Loans
Eligible entities for these types of loans are:
- Sole Proprietorship Firms
- Partnership Firms
- Private Limited Companies
- Public Limited Companies
- Self employed professionals such as doctors, dentists
Note: In Retail Traders aren’t eligible to apply for loans under the Guarantee Scheme of CGTMSE
Though the eligibility criteria through most lenders for Business Loans remain the same, the depth to which each lender may examine the applicant may vary. Given below are a few eligibility criteria that are being looked at by lenders in the current market.
- The age of the applicant in the case of a Business Loan is usually higher than the cut-off of other loans. On an average, applicants over the age of 25 can avail such loans. This is a necessary condition, but is not a sufficient one
- Annual turnover of the business should be between 10 Lacs – 100 Cr. (loans over 30 Cr. would fall under the ambit of SME Loans). The maximum amount that can be availed is usually in the range of ~50 Lacs.
- The credit score of applicants becomes a very important criterion for Business Loans. This is because neither a guarantor nor collateral is kept by the lender.
- MSME Loans are usually incentivized for women entrepreneurs at lower rates of interest.
- A passport size photograph
- Proof of Identity
- Age Proof
- Address Proof
- Proof of Business existence
- Balance sheet for last 3 years
- ITR for last 3 years
- P&L Statement – Last 3 years
- Last 6 months bank statements
Fees and Charges
Usually a processing fee up to 2% is charged on such loans. The same will be deducted at the time of the disbursal of the loan.