The small and medium enterprises (SME) segment in India has lagged behind in development for decades despite providing employment to half the working population. One of the key reasons for this lack of progress is the inadequate and delayed access to small business loans. Most small businesses operate as family businesses, and since inception, they have paid scant attention to formalising business processes and bringing in the much-needed transparency to attract investments. This is also the reason why their business prospects and requirements do not come out clearly enough to convince formal lending institutions such as banks to sanction small business loans.
The scenario is set to change hereafter with the implementation of GST, and most business processes are now expected to be transparent due to digitization. However, even with the taxation reform, the business finance scenario will take time to transform. Most banks are themselves grappling with rising non-performing assets (NPA) or bad business loans, and they are likely to turn more cautious before providing small business loans without collateral.
SMEs regularly need business finance to meet their working capital needs and to fund business expansion. In the absence of business loans from banks, most rely on informal lending channels such as local moneylenders. Such lenders charge exorbitant rates of interest and their mode of operation is unprofessional. Therefore, there is a pressing need for the complete overhaul of the lending system for SMEs. New age FinTech lenders with their aggressive use of technology have alleviated the crisis to some degree. Such lenders use Big Data and analytics to process a business finance application. The entire process is completely transparent and once approved, the small business loan amount is credited to the borrower’s bank account in just 48 hours. The FinTech lenders look carefully into the business prospects of an organisation and the very recent past and future business receivables before deciding upon business loans.
However, SMEs need to plan and organise certain things before venturing out for small business loans. Let us discuss a few.
- Be clear about the purpose for which the loan is required: An organisation could need business loans for various needs such as procuring raw material, payment of suppliers and salaries to employees, maintenance of equipment and for expanding business premises. However, before you approach a lender for small business loans, you need to have the right documents to justify that business need. For instance, if you have business receivables that are due after 90 days, but are short of business finance to meet immediate needs, you can convince a lender to provide small business loans. Similarly, if you need business finance to expand business and your business receivables show an upward spiral, then again there is a reasonable chance that your business loan application will be approved immediately.
- Determine when you need business loans: Are you approaching a festival season? Do you need it to purchase machinery when your new plant becomes operational? Is there a new business opportunity coming up that you want to grab? These are some of the timelines that you need answers to before approaching a lender for small business loans. Remember, a clearly defined business requirement with specific deadlines goes a long way in helping business loans to be approved faster.
- Calculate the right amount of small business loans required: This is a critical parameter and must be carefully calculated based on your business need. Never try to overestimate or underestimate the business loan requirement. A precise judgement of business finance shall convince the lender about the genuineness of your business need and highlight the seriousness with which you pursue business objectives. Moreover, taking more small business loans than you actually need might land you in a vicious debt cycle, which can often spiral out of control.
- Ensure timely repayment of the loan: Unsecured business loans come at higher interest rates than secured small business loans, and therefore you should intend to repay them in the shortest time possible. Remember, they are meant primarily to meet an urgent business need and should not be compared with long-term business loans taken for a strategic business plan. For instance, small business loans should only be taken to bridge the gap between product delivery and invoice payment. Such a period should ideally be not more than three months.
- Be mindful of your credit score: Always take a business loan application process and its subsequent repayment seriously, as this affects your credit rating. Lenders keep a close eye on the rating and consider it as a major indicator of whether or not your loan should be approved. This includes loans taken both for your business and for personal needs. Timely repayment of business loan instalments not only enhances your credit score, but also ensures you have adequate sources of business finance available in future, should a need arise.
- Choose the right small business loan for your need: Various innovative small business loans are available that are designed to meet the different needs of different businesses. Supply chain finance is one such product that provides loans against business receivables from large corporate houses. Small businesses can expect to receive up to 85% of total invoice amount at extremely competitive interest rates. Similarly, online seller finance works best for merchants that sell on online marketplaces and need business finance to meet seasonal spikes in business or to expand their line of business. Another product called merchant cash advance works best for retailers who receive the bulk of their payments through card swipe machines. Such traders can get up to 90% of their business receivables as an advance and repay it as a specific percentage of their card receivables each month.
- Evaluate the financial status of your business: You need to maintain a healthy list of your business receivables both from the past and from those expected in future to bring to light the financial health of your business. You also need to maintain all relevant tax documents, identity proofs, previous loan statements and banks statements for the last six months to maximise the chances of your loan getting approved.
By applying due diligence and meticulous upkeep of important business documents, you can ensure that your loan application gets approved in the shortest time possible. By taking a small business loan from new age FinTech companies, you get maximum transparency and access to innovative loan products.