Entrepreneurship is the buzz word of late. Having seen runaway success of many home-grown companies like Flipkart, PayTM, Zomato and BookMyShow, many individuals look forward to tread the path of entrepreneurship. Though ideas may be in abundance, every enterprise requires funds to move on and grow.
Small businesses are often run by a small group of people and at times the founder is the heart and soul of the business. However, they may not only need funds for running his business, they may require funds to meet many of their personal requirements. However, a self-employed businessman faces a double whammy when it comes to credit options.
On the business front, lenders are not open to lending to smaller businesses due to factors like lack of proper accounting, unavailability of assets for collateral or insufficient business credit history. While on the personal front, the founder or the person running the business might struggle to get loans due to lack of fixed salary and the security of working with a company.
So what are the credit options that are available to a self-employed businessman? CreditMantri, as your credit coach, is glad to provide you with credit options that a self-employed businessman can avail for funds both on the personal as well as the business front.
Credit Options for the Self -Employed on the Business Front
#1: Government Sponsored Initiatives
Initiatives like Make in India have gained ground in the recent past and to encourage entrepreneurship, the Government of India has come out with many initiatives like MUDRA, Credit Guarantee Fund Scheme for Micro and Small Enterprises, Technology Upgradation Fund Scheme, Stand-Up India and Market Development Assistance Scheme.
These are various kinds of programs run by the government to support various areas of the business development. MUDRA loans, being the flagship programme of Pradhan Mantri Mudra Yojana scheme, provide funding of different amounts depending upon the stage of business operations. The 3 variants of the loans are as follows
- Shishu- Loan up to Rs. 50,000
- Kishor- Above Rs. 50,000 and up to Rs. 5 Lakhs
- Tarun- Above Rs. 5 Lakhs and up to Rs. 10 Lakhs
In addition, there are other schemes like below that you could consider exploring
- Credit Guarantee Fund Scheme acts as a guarantor for the funds borrowed by MSMEs.
- There is also a portal “psbloansin59minutes” that provides quicker loan approvals and disbursal on MSME loans.
- Technology Upgradation Fund is an assistance provided to the individuals in the textile sector with a view of strengthening the textile export sector.
- Stand Up India is a scheme mainly aimed at entrepreneurs in the SC/ST sector and helps in bringing about social equality. Women entrepreneurs are also encouraged under this initiative.
All these loans can be availed through any nationalized bank.
Additional Reading: More about Small Business Loans offered by the Government of India
#2: Business Loans
Though getting loans from banks and other financial institutions is an uphill task for any small business owner, it cannot be said to be an impossible task. If the business is run according to the rule, proper books of accounts are maintained and the business shows good potential for growth and revenue, getting business loans from banks should not be a problem.
Additional Reading: Our guide to the right procedure for availing business loans
#3: Loans From Fintech Lenders
Understanding the need for finance that business owners have, many fintech lenders have stepped into the space with easy norms and conditions for availing loans. These lenders do not have stringent conditions for lending and often look beyond credit scores or credit ratings for business. These lenders utilize their own algorithms to base their lending decisions on, which help them to lend to a diverse range of businesses ranging from small to big. In addition, they have shorter processing time and you can expect to see funds in your bank account just in a matter of a few days.
However, on the contrary, these lenders tend to have a higher rate of interest, so it might be good to weigh your options in relation to your need for finance.
In addition, there are other methods of finance that self-employed businessmen could explore to meet their needs. These could be Merchant Cash Advance, Invoice Factoring or Financing, Overdrafts or Equipment Financing. Read more on how each of them can work to your benefit.
Credit Options for the Self-Employed on the Personal Front
When the businesses are small, there is hardly a distinction between the personal and business front. In fact, personal credit score often matters in business loan decisions too. Many a times, the funds raised on the personal end can be used to fund business requirements too. Let us explore the options available to a business owner on the personal front. As these loans do not come with a fixed end-use agreement, they could be used for personal or business purposes.
#1: Personal Loans
Personal Loans are one of the most easiest loans available in the credit market for individuals. These loans do not come attached with a end-use condition and are disbursed on less documentation than other secured or business loans. They are also disbursed quickly with certain banks claiming to disburse loans in a matter of seconds for pre-approved customers.
#2: Gold Loans
We Indians are extremely fond of the yellow metal. Each family has reserves of the metal stashed away as jewelry or gold bars. Availing a loan against this asset is an excellent way of putting to use this illiquid asset. Gold that is offered for loan is tested for purity by the valuation experts of the Gold Loan companies and around 60-80% of the value of the gold is allowed as loan.
An interesting point here is that, neither does gold loan require a good credit score nor does it requirlots of documentation.
#3: Loan against Property
Real estate is another favorite among us. We not only invest in homes where we stay but also invest in multiple real estate ventures for capital gains. These assets can easily be used for availing loans for business or personal use. Loans to the tune of 60-75% of the value of the property are generally approved depending upon other conditions like title of the property, age of the building, location, etc.
However, the documentation needs for this kind of loan would be on the higher end.
Additional Reading: Know the key differences between a home loan and a loan against a property
#4: Personal Loans from Fintech Lenders
As with business loans, fintech lenders play an important role in making credit eligible to underserved personnel like people with low or no credit score. These lenders provide various kinds of credit right from payday loans to line of credit and normal personal loans to meet financing needs of an individual.
Be it a self-employed businessman or salaried individual, everyone needs to pay attention and be responsible towards credit to ensure that they remains creditworthy for any credit in future.