The general finance market today has explored a vast scope in funding the small and medium enterprises (SMEs). Unlike the previous decade, banks have expanded their credit options to SMEs by regularly updating their product lines, services and even opening special counters.
Business loans can be applied for a variety of requirements such as starting new business, expansions, new purchase factory and land, working capital requirement, construction etc.
Business Loan Categories
Term Loans: There are different types of term loans today – short-term loans, long-term loans and intermediate loans, which the entrepreneur can avail upon his requirement and financial position. The maximum tenure of a short-term loan will be 5 years and for a long-term loan is 10-15 years. There will be slight interest variations for each.
Term loans are of two types – secured and unsecured. In secured loans, the collateral can be a property, business premise or machinery and will usually have lower interest rates than an unsecured one.
Overdrafts: The word overdraft means overdrawing from your current account. In other words, the account holder withdraws more money from the account than what has been deposited. If the amount overdrawn is within the limits of a prior agreement, the interest will be charged at an agreed rate. A higher interest rate is applicable if it exceeds the limits. As an overdraft can be covered with the next deposit, it is an ideal source of temporary funding.
Bill Discounting: In this process, you get instant cash on large purchases or the credit sales made by discounting your purchase/ sales bill at your bank. You need to produce the documents which authenticate the transaction like trade invoices, truck receipts/ railway receipts, bill of lading etc.
Letter of Credit: Letters of credit are used primarily in international trades of significant value. They are also used in the land development process. The parties to a letter of credit are the issuing bank of whom the applicant is a client, a beneficiary who is to receive the money, and the advising bank for which the beneficiary is a client.
A letter of credit is often used in international finance where buyer and seller do not know each other, the business transaction will be facilitated using the bank’s creditworthiness.
The documents, a beneficiary needs to present in order to receive the payment includes a commercial invoice, bill of lading, and an insurance policy that covers the goods in transit.
Schemes for Women Entrepreneurs
Banks are now unveiling a slew of attractive lending schemes for women entrepreneurs. Many schemes that are exclusively for women provide relief in terms of collateral security and interest rates. Interest rates vary in most cases from 0.25 per cent to 1 per cent on applicable conditions.
Some banks have special cells for women entrepreneurs. Besides consulting, here they provide training, counseling and at times, avenues for showcasing and marketing their products. They give a more realistic view of the businesses and often give references of similar businesses and the issues they were facing initially.
If women’s ownership in a company is less than 50 percent, the benefits of women’s schemes cannot be availed.
How to approach a bank
As in the case of any other loans, in business loans also creditworthiness is evaluated by your repayment capacity and reliability. For this, banks will analyze the financial statements and records of your business.
The capital money you have personally invested into your business is also important from the bank’s perspective because it is the level of confidence you have for your own business.
Banks in such cases will look into your background, credit history, assets and liabilities, education, business experience, business plan and its feasibility. A clearly prepared and well-researched business plan shows how much dedication and passion you have for your business.
For new entrepreneurs, banks are even working out schemes of sanctioning loans on the basis of the good track record of their existing or extinguished loans. But at the same time, taking too many loans would restrict your credit worthiness and will create a negative impression that you are having too much liabilities.
Having insurance attached to your property/ equipment is a cushion for credit managers to sanction the loan as it is always the concern of the bank, the security and the risk patterns attached to each business. Some banks even insist on having insurance.
So a clear and professional business plan is very important before approaching a bank. You should also have a thorough knowledge about the market of your products and how you are going to operate.
Banks are also focusing on long-term working capital loans for SMEs and the expansion of credit facilities to new geographical areas like the lesser-developed states, thereby promoting the inclusive growth of SMEs across the country. Further, the Government is also taking considerable initiatives to step up credit flow to SMEs.