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1. Types of unsecured business credit
Small business owners can access unsecured credit as a business overdraft or a business installment loan. These types of debt financing do not require any collateral, are processed quickly and are usually more expensive than secured loans. Access to additional bank services and the flexibility for the utilization of these funds are additional advantages.
- Business Overdrafts: Business overdrafts or cash credit facilities offer businesses cushion for cash flow and working capital shortfalls in the short run. Interest is payable on amount utilized. Amounts and interest levied vary according to past banking history and credit balances and are repayable commonly over 12 months.
- Business installment loans: Business installment loans finance expansion plans to increase potential without committing any assets held. Repayment is through EMIs or on flexible remittance over a fixed tenure, usually 60 months. These are applicable for financing over Rs 5 lacs.
- Unsecured lines of credit ranging from Rs 50,000 to Rs 35 lacs: Most small businesses over two years old qualify for an unsecured line of credit, with the exception of cash-based industries. The majority of unsecured credit lines are provided by larger lenders. Smaller regional banks shy away from providing these products until they have established a strong business banking relationship with the borrower. Policies for unsecured lines of credit vary slightly from bank to bank. Possible additional costs may include processing fees up to 1 to 2.5 percent of the amount disbursed, prepayment penalties up to 5 percent of the outstanding principal and penalties on non-payment or delayed EMI payment.
General Required Documentation: Certificate of registration, latest tax returns filing receipt, identity proof, residence proof, proof of property ownership, bank statements for previous 3 to 6 months, and the credit application of lending institution (filled and signed by borrower). Post dated checks at the time of disbursement.
Tips to strengthen case:
- Present a well thought out business plan. Take professional help in creating the presentation if needed.
- Collateral can be waived if the business has a sound track record. Presenting personal financial statements, details of business accounts receivables, assets, confirmed orders and client lists may help to validate business solvency. A solid credit rating helps. If there is a problem, come out and explain the conditions and status.
2. Equipment financing term loans up to Rs 2,000
Any business with equipment can qualify for this financial product. Most large lending institutions in India and some specialized equipment financiers provide equipment financing loans.
General Required Documentation: Estimation of equipment value from supplier, estimation of capital improvement and construction costs
Tips to strengthen case:
- Provide a detailed breakdown of the equipment (include make and supplier).
- Provide the estimation of capital improvement costs from an approved general contractor.
- Provide information for equipment installation (floor plans, copies of lease agreements, etc.).
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Consistent equipment investment is necessary to improve productivity. It may be more convenient and affordable for a business to lease equipment rather than directly purchase machinery with borrowed funds. However, existing equipment serves as collateral and security for obtaining loans at lower rates for financing other aspects of the business.
Financing
With equipment as collateral, Indian institutions lend at lower rates (sometimes by 100 to 300 basis points) and longer terms than unsecured financing. A typical equipment loan term extends anywhere from 7 to 10 years (based on the residual value) compared to an unsecured line of credit term of 2 to 5 years. Also, with equipment financing, business owners can claim depreciation on taxes. An equipment financing loan gives borrower’s the option to choose between a floating and a fixed rate line and does not require line rotation.
Leasing
Equipment leasing provides financing for all types of movable personal property (defined as anything other than real estate) to qualified commercial businesses throughout India. The equipment lease is a non-cancelable contract, extended for a specific period of time (typically five to seven years.) The equipment remains under the ownership of the Lessor and/or its assigns. In return for periodic rental payments, the Lessee has unrestricted use of the equipment throughout the duration of the contracted period and any renewal periods that extend thereafter.
Financial leases require the Lessee to maintain, repair and insure the leased equipment during the leased period. The Lessee is also responsible for all taxes, license fees, and similar charges imposed upon the property or payments under the lease.
Normally, the lease does not commence until the equipment has been delivered and is in operating condition. After approving equipment delivery and condition, the Lessee sends a formal certificate of delivery and acceptance to the Lessor. The lease begins when the Lessor receives the certificate. Payments are usually on a monthly basis.
Most Lease contracts in India require a minimum worth, equal to around 50 percent of the total net worth of the Lessee. Lease payments are fully tax-deductible for the Lessee until the equipment is purchased through loans or another financing method.
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Unsecured loans from banking and financial institutions can serve as a life-line and even a mechanism for growth for a business in India during a downturn. Line of credit products include overdrafts, discounts or waiver of commercial bills, demand loans, and other debt instruments. The business owner is only responsible for interest payments on the used amount of the loan. Lines of credit can be used to develop several opportunities for a business. And now, with lending rates decreasing in India, the time is ripe for a line of credit.
1. Cushion for seasonal sales lows
Businesses with varying revenue streams need capital during slow periods to operate efficiently. A line of credit can help entrepreneurs stay financially afloat in India until excess funds from more lucrative months roll in. Predicting the degree of a seasonal downswing is difficult, making term loans an impractical solution. Fortunately, with a line of credit, borrowers only have to pay interest on the amount used.
2. Ease payment cycle cash crunch
Businesses in India with long accounts receivables often experience cash shortages that hamper business growth and put pressure on maintaining service standards. For example, in the IT staffing industry, companies need to spend a lot of time (sometimes up to 30 days) and money upfront to recruit, train and deploy personnel. Generally, companies do not receive payment for 90 to 120 days. The company is forced to cut costs, like those on training programs, which affects the overall service level. A line of credit against accounts receivables (also known as accounts receivables financing or accounts receivables factoring) solves these issues. Indian lenders fund up to 90 percent of the receivables, depending on the legitimacy of the customer base of the business.
3. Cost Savings
A line of credit gives a business the liquidity to take advantage of discounts available through bulk purchases or cash advances. For example, wholesale distributors of wireless pre-paid phone cards need cash for buying minutes in bulk from telecom companies. Paying upfront can earn the distribution company a 3 to 5 percent discount on the cards. The need for working capital arises when retail customers pay the distributors over a period of 14 to 21 days. Access to cash becomes crucial because discount savings directly improve a business’s bottom-line. |
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