Credit is a great tool that can come in handy at any time, be it a personal or a business need. As individuals might need loans to fulfill many of their needs and wants, so is the case with businesses. The need for credit in business is more pronounced as the credit requirements are of a larger magnitude, which is difficult to be met out of personal resources.
Business credit can take many forms depending upon the duration and the quantum of credit required. Some of them being: Working Capital Loans like Overdraft, Line of Credit, Packing, Shipment Credit and Short-Term Credit loans. Longer term loans/credit come in form of equipment financing, term loans, invoice financing or various forms of government credit, and is available for longer durations.
All these forms of credit do not involve giving up control/ownership of your business. However, if you are willing to cede control, then you can also think of going for options like private equity, venture capital, sweat equity, etc.
Procedures Involved in Availing Business Loans
Coming back to business loans, as with any other forms of credit, there involve certain rules, procedures, and documentation. As the magnitude of finance required is much higher than that for personal finance, the procedures involved are much more extensive and involve a lot more documentation. This could again vary depending upon the lender that you choose.
The steps involved in availing a business loan are:
Establish the need for a loan: It is important for you to establish the need for a loan. Many schemes and offers are run by the government/other agencies to help a business establish themselves and grow. Do not be tempted to apply for every offer you see. Also, when you approach a bank/lender for a loan, they will want to make sure that you have a strong need for credit before approving it. This step will also ensure that the business does not underestimate/overestimate its need for credit.
Make a business plan: You will require funds to build or expand your business. A clear plan of action of putting the funds into rightful use is non-negotiable. Every lender would like to see the use of funds and how the business will be benefitted, as that will ensure that the lender gets their repayments on time.
A good business plan will include the purpose of your company, details of operations in the past and information about future plans. It is also good to include information regarding the management, their experience and their vision of the company.
Get your papers in order: This might be the most difficult step involved in availing a business loan. The business operations involve far more complex financial transactions, taxes, permits, etc. Hence a lender would like to get as many details as possible and complete a thorough due diligence before approving your loan.
Additional Reading: The CreditMantri Guide to Business Loans
The documents that are generally asked for are:
Certificate of Incorporation or the Partnership Deed
Bank Statements of your business account
Last three years of financial statements like Profit & Loss Accounts, Audited Balance Sheets, Audit Reports, etc
Reports of Statutory Filings like Income Tax Returns, GST returns, VAT returns (for earlier periods of business)
PAN cards of the business and other key operating personnel
Projected financials for the future terms
Any other supporting documents for specific loans like Equipment financing, invoice financing, etc
Get professional help, if needed, to set your documents in order: Documentation is an important part of ensuring if your loan gets approved or rejected. If you are unsure if the documents are in order as required by the lender, it is good to get a professional like a Chartered Accountant and/or Company Secretary to run through your documents before you approach your lender, so that you do not waste time at a later date getting your documents in order.
Approach your lender: Weigh the pros and cons of approaching various types of lenders before approaching one. A bank loan may come at a lesser rate of interest but may involve time and effort. On the other hand, a small co-operative bank may not need so much documentation but offer a high rate of interest. It is also necessary that you take into account the processing fee and other associated charges.
It is also good to approach a known lender or bank where you have an existing account. It is always easier to approach the lender situated in your city/town than someone in other towns. Traditional lenders can often take about 15-45 days to process your business loans. You must also check with your lenders for the collateral requirements.
Fintech Lending for Business Loans
As we have seen from the above, there are a lot of procedures and heap of documents that are required for availing a business loan. And not to mention the time involved in getting one approved.
Moreover, the entire documentation involved in availing a loan makes it difficult for Small and Medium Enterprises that are not subject to audit and other statutory procedures to avail loans. They get excluded from credit and often have to resort to borrowing from unorganized sectors or bootstrap themselves by borrowing from friends and family.
India being the hotbed of start-ups and innovations definitely needed much simpler and faster methods of disbursing business loans. This led to the emergence of lending by fintech companies. These are similar to the ones lending to the retail segments.
How is borrowing from fintech companies different from traditional sources?
Lesser Documentation: Fintech companies rarely require you to submit dozens of hard copies of all your documents. All that is needed for you is to upload soft copies of the required documents. The documents required in themselves are often less and limited to major documents in support of your loan. Generally, required documents are company and management profiles, financials through Tally and Bank Statements & IT returns.
Algorithms Decide Your Approval Status: While traditional lenders make use of a strict set of conditions to determine if you make the cut for approval, new-age/fintech lenders determine eligibility on a case-to-case basis. They obviously require a certain amount of documentation, but it is not the only criteria for determining your approval status. They also use certain algorithms to determine the eligibility of your business to get a loan.
Faster Approvals: Fintech lenders make use of technology, thereby expediting the process of approvals. You would no longer have to wait for long periods of 30-45 days to know the status of your loan approval.
If you approach a fintech lender, you should get to know the decision in a couple of minutes/hours and receive funds in your account in a couple of days at the most.
Additional Reading: 4 Great Short-Term Loans Every Business Owner Should Know About
No Need For Collateral: Most of the fintech lenders operate on a no -collateral model as they do not lend for very big amounts. Fintech companies generally lend for up to Rs. 1 crore and they start from as low as Rs. 1 lakh. These companies evaluate businesses solely on the strength of their cash flows and expected receivables, hence there is no need for businesses to pledge anything.
General Eligibility Conditions To Apply To A Fintech Lender: As these lenders cater to loans on a case-to-case basis, there are no set eligibility criteria. But the general conditions may be
1+ year in business
More than ₹ 25 Lakhs in annual turnover
However, these companies are often happy to lend to other establishments that exhibit strong growth and management capabilities even if they don’t meet the set minimum criteria.
The Procedure Followed For Loan Approvals And Disbursals: It is good to know that each and every fintech has their own procedure for loan approval and disbursal. Generally, you can apply online and fill the application in 15 minutes. Then, you have to submit KYC documents and your application processing begins.
Interest Rates And Other Charges On A Loan Availed: Ultimately, the rate of interest and other charges levied on a business loan are also of prime importance for a business, especially for small and medium business owners.
Some fintech lenders/banks may charge you higher rate of interest, but may require minimal documentation. The opposite can also be true, where the interest rate would be lower but the documentation would be higher.
No Prepayment Penalties: Fintech lenders do not charge prepayment penalties on business loans, whereas the traditional lenders levy a prepayment penalty of up to 5% of the loan.
No Hidden Charges: There are no hidden charges involved while borrowing from a fintech lender.
No matter who you borrow from, you have to portray responsibility in handling your credit each time so that you build your credit profile and be eligible for future credit whenever you need it.