Loan Basics. Loan choices for your small business

If you’re the owner of a small business, getting adequate credit is bound to be one of your key challenges. However, recent government initiatives promise to open up new sources of funding for small enterprises. Here are a few of them.

First, there is the newly launched Mudra Bank (Micro Unit Development and Refinance Agency). The agency works in association with banks, NBFCs and microfinance institutions to help small businesses secure funds.

The bank offers three schemes. The loan size can be below ₹50,000 for the Shishu category, between ₹50,000 and ₹5 lakh under Kishor and ₹5 lakh-10 lakh under Tarun.

Mudra is also in the process of offering specific schemes for qualifying entrepreneurs in select sectors and locations.

The segments covered include not just manufacturing but also service sector units and traders in urban and rural areas.

Besides loans for asset purchases, Mudra Bank also plans to offer working capital and bridge loans. “An interesting feature is the Mudra Card that will be offered along with a sponsor bank to avail of working capital using the ATM network,” says VG Suchindran, CFO, Veritas Finance, an NBFC that is awaiting the RBI nod for lending to small businesses.

Entrepreneurs can avail credit against purchase of raw materials and components from registered producers for up to 20 per cent of the loan limit or a maximum cap of ₹10,000, with this card. Credit risk of up to 20 per cent of the card portfolio could be covered under the Credit Guarantee Scheme of Mudra. Corporation Bank, IDBI Bank and Bank of Maharashtra have tie-ups to issue Mudra Card based on the RuPay platform. You can also check the Ministry of Micro, Small & Medium Enterprises website ( msme.gov.in ) for details on various loan schemes available.

While Mudra is a new SME financing agency, specialised banks such as Sidbi (Small Industries Development Bank of India) are already quite active in this space. Funding under Sidbi’s Growth Capital and Equity Assistance scheme can be obtained for marketing, brand building and creating a distribution network. Businesses with a track record of three years of profitability and two years of good credit history with a bank can get bridge funding with flexible repayment structuring under this programme.

Sidbi also offers early stage debt funding on softer terms for development, demonstration and commercialisation of new innovations in emerging technological areas and new products and process under its Srijan Scheme.

You can get a loan of up to ₹1 crore after a technical and financial viability evaluation of the proposal.

If your company is older than three years, unsecured and secured loans from public sector and private banks can be considered. These loan tenures range from one to four years.

Also, check if the loan is covered under the Credit Guarantee Fund Trust Scheme for Micro and Small Enterprises. Under this, banks can extend loans for up to ₹1 crore without any collateral security for term loan and working capital requirements.

For a relatively new business, there are NBFCs you can approach. Shriram City Union is the oldest player in this segment and offers loans to businesses that have been in existence for at least two years. The loan amount you can avail of is based on the annual income of the business. The operations of the businesses are assessed by the lender to determine the profit margins, sales and receivable cycles before the loan is approved, says GS Sundararajan, Director, Shriram City Union.

Capital Float lends to companies that have been in existence for at least a year and have an annual turnover of at least ₹25 lakh. Between ₹3 lakh and ₹1 crore can be borrowed for up to one year at over 18 per cent interest rate and a processing fee of 2 per cent. Capital First, Magma Fincorp are other NBFCs also active in this segment.

If the need is for a short-term loan of, say, 30-180 days, you can also consider taking a loan against receivables. You can submit the invoice or purchase order to get ₹3-50 lakh (up to 80 per cent of the invoice value). The loan must be returned as a bullet payment.

Before you approach a lending institution, prepare a roadmap explaining the business model, financials such as sales, profits, growth, margin, as well as background, giving the experience of the promoters.

“If the owners can maintain their business documents such as VAT return, purchase bills, sales invoices and Udyog Aadhar, it helps the lending organisations do their assessment using these as surrogate documents to prove the entrepreneur’s claim of income,” says D Arulmany, Promoter and Director of Veritas Finance.

“Building a relation with the lending institution right from the early stages is important,” says Venkatakrishnan, a chartered accountant who advises entrepreneurs. He also suggests that entrepreneurs register their businesses and get an SME number from the Ministry of MSME that will help them avail of various benefits.

COMMENT NOW