In this episode, Nishant Jasapara, Business Head - Digital Finance, IIFL, explains the benefits of Business Loans.
Any business would require an adequate amount of capital to cover the expenses and let the business run without any hassle. A business loan is a debt which a business firm takes from a financial institution with the obligation to repay it according to the loan terms.
A business loan is generally taken by SMEs (Small & medium enterprises) and MSMEs (Micro SMEs). These can also be taken by traders/shopkeepers, dealers/stockiest/distributors, small manufacturers, service industries like travel agents/hotel and restaurants contractors, etc. and even professionals like architecture, CAs, doctors, etc.
In basic terms, a micro enterprise is when the investment in plant and machinery does not exceed 25 lakhs. A small enterprise is when the investment in plant and machinery is 25 lakhs to 5 crores, and a medium enterprise is when the investment in plant and machinery is 5-10 crores.
As these companies are not big enough or do not have enough capital, they require business loans for:
Working capital requirements for covering day to day expenses
To venture into a new line of business as a part of the future expansion
For capital expenditure like buying plant or machinery
For a while now, banks have been going through the problem of bad loans, and hence, are unwilling to give loans to many SMEs and MSEs. Therefore, small businesses face issues related to getting the required amount of loans to run their business.
Non-Banking Finance Companies (NBFCs) have stepped up and have emerged as loan providers to SMEs and MSMEs in order to meet their funding needs. Hence, in FY17, the share of banks in new credit dipped to 35%, while non-bank sources met the remaining 65% of credit demand in FY17.
Non-banking sources lend as much as 9.25 lakh crore to business, crushing the bank credit flow of 5.02 lakh crore. The unwillingness of banks and the sophisticated process of obtaining loans has pushed the business more towards the Non-Banking institutions.
Among the products offered by the lenders to the business are:
Term loans: Term loans have a tenure of 12 to 36 months with the rate of interest between 16-21%.
Overdraft facility: The facility of overdraft is also provided with the tenure of 12 months, and the rate of interest charged is between 16-21%.
Invoice discounting: Invoice discounting is also available as a facility with the tenure of 30 to 120 days, and the rate of interest charged for this facility is between 14-18%.
To obtain a loan from any source available in the market, the business will be required to present certain documents like:
Know your customer (KYC) documents: Includes proof of identity and proof of address. Documents like Aadhaar card, PAN card, driving license, ration card, voter’s id, etc. are required.
Bank statements: Bank statements of the last 3 to 6 months will be required.
Business registration certificate: The business will be required to produce their business registration certificate for validating that it is certified and legal. Eg GST Registration certificate, Shop and Establishment.
Financial statements: Financial statements like the Balance sheets and income statements for the last 2 yrs will be required to let the lender understand your financial situation.
Underwriting process is a very important step in the process of lending loans to businesses. Every company has to go through a screening process, which evaluates certain parameters like whether the business can repay the loan amount.
Promoters profile, Business model, and Vintage: Lenders assess the profile of the promoter of the business, its business model and the number of years for which the business has been operating is called vintage.
Financial statements: The financial statements of the business for the last 2 years are studied to get a general idea about the health of the business, and its assets and liabilities.
Banking analysis: Lenders evaluate the bank statements to understand cash flow, details of EMI’s debit for existing loans and so on; also, cheque return data, etc. is studied to determine the loan repayment potential of the business.
Repayment and Credit Bureau history: The Company’s history in repaying previous loan interests. It’s CIBIL score is taken into account to figure out the nature of the past loans taken, etc.
Market references: The lender also looks at the market references to determine the market image and goodwill of the business in the market.
Following are the benefits non-banking institutions provide, but banks don’t:
You can apply online for a loan anytime as the application facility is available 24/7.
The loan process includes easy application steps that can be completed in just 10-15 minutes.
Unlike banks, you don’t have to visit the branch for obtaining a loan.
As the documents are verified online, the whole process becomes easy and hassle-free.
The loans are disbursed quickly within 3-4 days, and if the loan amount is not substantial, it only takes 1-2 days in disbursement.
Loan repayment options are easy for businesses.
IIFL SME Business loans require minimum documentation and are available at attractive rates. We work on six simple steps:
1. Customer application
2. Basic credit checks as per policy
3. Final credit decisioning
4. Collection of documents, cheques, etc.
5. At operations
It only takes us 2-3 days to disburse the loan amount, and the business loans we provide are without any collateral.
Mr. Nishant worked with IIFL as a Chartered Accountant and a Company Secretary. He has 15+ yrs of experience in the Retail lending space and has handled multiple product suites across Business Development, Sales, Product and Credit. Prior to joining IIFL, he has also worked with Tata Capital, ICICI Bank & Time of Money Ltd where he has handled multiple roles and responsibilities for Business Loans, Loan Against Securities and Consumer Durable Loans at different points in time.
Business loan is a debt taken by micro, small and medium enterprises (MSMEs or SMEs) from a bank or non bank finance corporations to fulfill their capital needs. If you are a businessman and have a legal and certified business, you can take a business loan from a finance institution.
business loan can range from Rs3lakh to Rs50lakh. It also depends on a financial institution to sanction the applied amount after underwriting your business thoroughly.
The interest rate is fixed and will not change until you have repaid the loan completely.
The tenure for a business loan is 12 months to 36 months, depending on the loan amount.
You can choose any of the modes from direct debit, ACH/ECS (Electronic Clearance Service) or Post dated cheques to repay such loans.
Banks usually take longer to disburse loans. Unlike banks, it only takes 1-4 days to get a loan if you choose a non-banking financial institution.
Among several unique facilities, Term loans come with facilities like overdraft and invoice discounting.
Documentation includes: proof of identity, proof of address, bank statements, business registration certificate and financial statements related to the business.
Yes, all applications are scrutinized by underwriters. You will have to go through an underwriting process, the parameters for which are: promoter’s profile, business plan, vintage, financial statements, banking analysis, credit bureau history and market references.
If you are taking a loan from a non-banking financial institution, you do not need collateral. It is an unsecured loan. In certain cases you would need to have a co applicant taken in the loan.