Business Growth
Loan

Following are the key features of Business Loan:

• Purpose: To meet the financial requirements of the business, including the purchase of new plant and machinery, to replace the existing plant and machinery, building infrastructure, expanding the business, etc. required to take the business to a greater level. Also, working capital finance is extended to provide for the day to day operational cost of the business.
• Loan amount: The loan limit depends on the project for which the finance is required. The assessment is based on the vision of the business through the projected financial statements for years up to which the repayment is fixed, the profile of the promoters, expected cash flow from the business, and other factors. 

For projects where the loan required is above  2 Crores, the project appraisal will be done by a team of skilled persons from the Project Finance Department (PFD) of the bank/financial institution. Based on PFD, liquidity ratio, Debt Service Coverage Ratio (DSCR), Fixed Asset Ratio, and various other factors, the quantum will be decided.

• Interest: The rate of interest varies from lender to lender., depending on the loan quantum, the project for which the finance is sought, line of activity, the business sector, and the customer's profile.
• Security: The security depends on the quantum of loan and also the business sector. 
  • Usually, for a loan up to Rs. 2 Crores to MSME Sector, no collateral security is insisted. The loan will be covered by the Credit Guarantee Scheme. 
  • Normally the primary security will be by way of hypothecation of the stocks and receivables if the finance is for working capital. 
  • Hypothecation of the assets created out of the bank finance if the loan is for capital investment. 
  • Collateral security by way of residential/commercial property will be required. 
  • The agricultural property will not be accepted unless the finance is for agricultural and allied activities.
• Repayment: The working capital finance is short-term finance provided for a period of 6 to 12 months, which will be renewed on an annual review. The repayment period for term loans ranges from 3 years to 8 years and even up to 20 years if the construction of business premises is involved.
• Processing fee: Processing fee also depends on the nature of the activity and the business sector but generally will be up to 3.5% depending on the bank/financial institution.
• Prepayment charges: Some of the lenders do not collect any prepayment charges while others charge Nil to 6% on the outstanding balance.

The various types of Business Loans are as follows:

Working Capital Finance

Any businessman who is in the service/manufacturing business or retail/wholesale trading, imports/exports can make use of this facility. This facility is generally opted for when there is a liquidity crunch in the business due to irregular cash flow and funds are required for meeting the day-to-day operational expenses of the business or when there is a sudden increase in the volume of the business. Working Capital finance can be by way of a line of credit, overdraft, packing credit, post-shipment credit or even by way of non-fund based limits like Bank Guarantees and Letter of Credit.

This facility will be a revolving credit and can be used as and when required. The utilised amount can be replenished by depositing the amount when the cash flow of the business improves. The biggest advantage in this type of finance is that interest is levied only to the extent of the amount utilised and for the period utilised.

Rate of interest is mainly based on the credit appraisal of the business. The working capital finance will be for a period of 6 to 12 months and will be renewed after an annual review. The prime security for working capital finance will be the stocks and receivables of the firm/Company. Collateral security may also be insisted by way of a mortgage of residential/commercial property. It depends on the lender and the quantum of finance.

Term Loans

These loans are given mainly for capital investment, which will be of long-term in nature. It could be for building the factory premises, improving the infrastructure, modernisation of the existing structure, etc. The quantum of loan involved in this facility will be high and will be disbursed in a lump-sum. The repayment period also will be longer and can range between 7 years to 20 years. The rate of interest will be based on the profile of the Company, Credit Rating, the quantum and period of the loan.

The prime security will be the assets created out of the finance and collateral security will be a mortgage of residential/commercial property. To apply for this type of finance, you should have a detailed project ready along with a business charter as to how the loan amount will be utilised.

Invoice Financing

This is a very lucrative way of arranging finance for a firm/company. The time gap between raising an invoice and the final payment can be anywhere between 60 to 90 days. During this time, the firm/company may face a liquidity crunch and might need funds for the day to day operations of the business. Banks/financial institutions do provide finance against such invoices for customers who have a long-standing relationship and have been availing credit facilities which have been conducted satisfactorily. Up to 80% of the value of the invoice will be provided as working capital funds and the remaining 20% will be provided when the final payment is received. Invoice financing will attract processing charges and interest as per the guidelines of the lender.

Equipment Financing

Equipment financing is popular in the manufacturing sector. Any manufacturing business will require some mandatory equipment for manufacturing the product. Such equipment will be financed by banks/financial institutions. Funding will be done for office equipment, healthcare equipment, medical equipment, construction equipment, etc. The quantum of finance can be more than  100 Crores in some cases. The funding will be project-based. The rate of interest will be very competitive as the quantum involved will generally be high. The repayment period will be anywhere between 3 years to 7 years. Security of the assets created out of the finance will be taken and collateral of residential/commercial property will be insisted on a case to case basis.

PMMY

PMMY, i.e., Pradhan Mantri Mudra Yojana, has been introduced to encourage entrepreneurship under the MSME Sector and to create employment for the youth of the country. A loan is provided both for service and manufacturing units. The quantum of loan will be between Rs. 50,000 to Rs. 10 Lakhs based upon the line of activity.

Stand-up India

Stand-up-India was introduced to encourage setting up of new ventures by candidates who belong to Scheduled Caste/Scheduled Tribe and to encourage women entrepreneurs. Entrepreneurs belonging to Scheduled Caste/Scheduled Tribe or the women entrepreneurs should have the major shareholding in the firm/Company to be eligible for funding under the scheme.

The following are the common eligibility criteria for a Business Loan:

• The applicant or the promoters of the business should be in the age group between 21 years to 65 years.
• Proprietorship/ partnership firms and Pvt Ltd companies, self-employed individuals/ professionals engaged either in manufacturing, services or trading.
• A business vintage of a minimum of 3 years.
• A minimum business turnover and a minimum annual turnover as per the ITR will be required. The quantum of the requirement will vary from lender to lender.
• The firm/company should be profit-making for at least a period of 1 year.

The following are the common documents required for a Business Loan:

• Proof of address of the promoters: Aadhaar Card, Voter's ID Card, Driving Licence, Utility Bills, etc.
• Photo ID proof of the promoters: PAN Card, Passport, Voter's ID Card, Driving Licence, etc.
• Proof of business: GST Registration, Trade Licence, Registration under Shop Act, Drug Licence, etc.
• Income proof: Balance Sheet and Profit & Loss Account audited by an Auditor with Auditor's report.
• Other documents:
  • Partnership Deed in the case of Partnership Firm.
  • Articles of Association, Memorandum of Association, and Board Resolution as per the format provided by the lender in the case of a Company.
  • PAN Card of Partnership Firm/Company.
  • National and State Permit if finance is availed for a commercial vehicle.

Business loans involve various types of charges, like documentation charges, cheque dishonour charges, repayment mode swap charges, charges for duplicate NOC, cancellation charges, and so on. Following are three main charges types that are common for each lender:

• Processing charges: Up to 3.5% of the loan amount + GST.
• Foreclosure charges: Up to 6% of the outstanding loan amount.

Delayed payment penalty: 2% onwards over & above the normal rate of interest on the overdue amount for the overdue period.

• Prepare a business charter containing the details of your business plans for the next few years.
• Be aware of the credit score of the promoters as well as the company before approaching the lender.
• Decide the quantum as knowing the right quantum of loan is also a mandatory requirement.
• Do a bit of market research to understand the various options available for Business Loans in the market.
• Shortlist the options that suit your requirement and also check for the interest rates and other associated charges for the loan.
• Look for the lender which does not have elaborate approval procedures.
• Be aware of the documents required and keep them ready before applying for the Business Loan.

It is important to be aware of the credit score of the promoters as well as the company before approaching the lender. Credit scores indicate your repayment history. If both the company and the promoters have a good credit history, it will be that much easier to get approval for a business loan.

The eligibility check for a Business Loan depends on the following variants:

• The credit score of the company/promoters is mandatory. Good credit score depicts the financial discipline of the company/promoters, which goes a long way in the credit decision.
• The financial statements of the company, which consists of the balance sheet and profit & loss account of the company. Financial statements of the company for the last 3 years and projected financial statements for the next year will give a brief idea about the income generation and performance of the company.
• The DSCR indicates the repayment capacity of the company. The ideal DSCR should be between 1 and 1.5.

Yes. Part-payment facility after a certain lock-in period will be permitted. However, the number of times a part-payment can be made will depend on the lender. Also, part-payment charges ranging from 2% to 4% will be charged on the part-paid amount.

Business Loans should be paid in Equated Monthly Instalments (EMIs) for which auto-debit instructions have to be given.

Yes. Some banks do provide a dropline overdraft facility against the security of the immovable property.

For working capital finance, the repayment will be on demand. It is normally for a period of 6 to 12 months with a further renewal facility on an annual review. For term loans, the repayment period will vary from 3 years to 20 years depending on the project for which the finance is availed.