Entrepreneurism is on the rise in India. Campaigns such as Make In India and the encouragement for startups are making the business environment very conducive. However great an idea may be, it cannot take off without monetary backing. There are many sources of funding available to a business owner. However, certain avenues of funding like using venture capital funding, mergers or equity infusion involve dilution of your stake, which all business owners might not be comfortable doing. In these cases, the business owners can go in for loans.
Loans are available from sources like banks, non-banking financial companies or, from the Government; and they can be used either for short-term or long-term purpose. Loans form an important part of financing or tiding over short-term financial crunches for an entrepreneur/business owner.
Here are 4 important short-term loans that every business owner should be aware of.
Demand Loans: These are short/ very short-term loans available on an agreement with the lender and the borrower. Demand loans do not have a fixed rate of interest, a fixed term of repayment or a fixed loan amount. Under demand loans, the lender sets a limit for borrowing a certain sum of money, the borrower can decide to borrow any sum within this limit. The rate of interest is not specified beforehand but is a function of the demand and supply conditions. However, the main factor that differentiates this kind of loan from others is that the lender can choose to demand the loan at any period of time and the borrower is under obligation to return the amount with interest immediately. This kind of loans might not be available for all clients of a lender. If you have been an extremely creditworthy borrower, then a demand loan may be made available for you. If you manage to get a demand loan, make sure you meet the conditions under which it is borrowed, so that your credit rating doesn't go down.
Additional Reading: Do Companies Have Credit Scores?
Working Capital Loans: Working Capital loans are another form of short-term credit that is available to business owners. These loans are meant for meeting day-to-day expenses of the company, meet a sudden surge in business orders, seasonal shortfall due to any reasons, etc. The loans are granted at a fixed rate of interest and for a fixed period of time which could range from 6-12 months. Working capital loans are generally granted against a collateral. But there are instances where loans can also be granted without a collateral, but creditworthiness of the borrower plays a big part again.
Loans against Securities: The need for Short-term loans can arise at any moment for a businessman. There might not be enough time to go about raising a working capital loan. Also, there might be instances wherein the business owner might not be able to offer collateral for other loans. In those cases, the individual could use an option called Loan against securities.
To avail this kind of a loan, the borrower has to pledge their securities, shares or mutual funds as a collateral. Generally, each lender has their own margin requirements to lend against shares and mutual funds to cater to the fluctuation in the market. For Example: Tata Capital lends loans against securities at 50% of the market value and mutual funds to the extent of up to 70% of the NAV (Net Asset Value). Other features of this kind of a loan are that this loan acts like an overdraft facility. There is an approved loan amount and the borrower can choose to withdraw/borrow any amount within the overall limit and interest is charged only on that amount. This sort of a facility gives more flexibility to the borrower and lessens the overall interest burden. You also have an added advantage of swapping securities as per your outlook on the stock market and continue to enjoy the benefits of dividends, bonus and rights issues*. Certain companies also allow loans against Life Insurance Policies.
MUDRA Loan Scheme: This is a scheme promoted by the Government of India under Pradhan Mantri Mudra Yojana through an NBFC called the Micro Units Development and Refinance Agency Ltd. [MUDRA]. This NBFC provides refinance support to Banks/ MFIs for lending to micro units having loan requirement up to 10 lakhs. There are various kinds of support and loan services available through the scheme.
Loans can be availed under the scheme through Commercial Banks, RRBs, Small Finance Banks, Cooperative Banks, MFIs and NBFCs. The borrower can approach any of the lending institutions mentioned above or can apply online through www.mudra.org.in. There are 3 categories of loans available depending upon the size of the enterprise and their requirements. They are
Shishu - Loans up to Rs 50,000 are available for those enterprises or micro-units in their startup phases
Kishor - This category of loans is available to enterprises who need funds to expand their business or start off. Loans from Rs 50000 to Rs 5 lakh are available under this category
Tarun - Loans up to Rs 10 lakh are made available under this category. These could be used either for setting up a business or expand an existing one.
There is no collateral requirement for these loans. The rate of interest is priced against the current rates prevailing, and the repayment terms range between 3-5 years, with a moratorium of 6 months depending upon activity and income generation.
Repayment and meeting all conditions of borrowing are of prime importance irrespective of the kind of loan you avail. Whether for personal or business purpose, your future creditworthiness is based on how regular and responsible you have been with till now.
So, no matter which short-term loan you decide to go in for expanding your business or setting up your business, be responsible for credit at all times.
* Conditions may differ from lender to lender