The Loan, Your Business Growth Need!

Purpose:

• To meet financial requirements for business activities such as:
  • Purchasing or replacing plant and machinery
  • Building infrastructure
  • Expanding the business
  • Covering day-to-day operational costs with working capital finance

Loan Amount:

• Depends on the project requirements.
• Assessed based on:
  • Projected financial statements
  • Profile of the promoters
  • Expected cash flow
  • Other factors
• For loans above ₹2 Crores, a project appraisal by the Project Finance Department (PFD) will determine the loan amount, considering factors like liquidity ratio, Debt Service Coverage Ratio (DSCR), and Fixed Asset Ratio.

Interest:

• Varies by lender, loan amount, project, business sector, and customer profile.

Security:

• Varies by loan amount and business sector.
• Loans up to ₹2 Crores for the MSME sector typically do not require collateral, covered by the Credit Guarantee Scheme.
• Primary security for working capital finance includes hypothecation of stocks and receivables.
• For capital investment loans, hypothecation of assets created out of bank finance.
• Collateral security often required as residential/commercial property; agricultural property usually not accepted unless for agricultural and allied activities.

Repayment:

• Working capital finance is short-term (6-12 months) and renewable annually.
• Term loan have repayment periods extending from 3 to 8 yrs, or up to 20 yrs for business premises development.

Processing Fee:

• Up to 3.5% of the loan amount, depending on the bank/financial institution and nature of the business activity.

Prepayment Charges:

• Some lenders do not charge for prepayment, while others may charge from Nil up to 6% of the outstanding balance.

These features make business loans a versatile financial tool for various business needs and growth opportunities.

1. Working Capital Finance

• Purpose: For businesses facing liquidity crunch due to irregular cash flow or sudden increase in business volume. Used for day-to-day operational expenses.
• Types: Line of credit, overdraft, packing credit, post-shipment credit, bank guarantees, and letter of credit.
• Features: Revolving credit used as needed, with interest levied only on the utilised amount for the period used.
• Repayment: 6 to 12 months, renewable annually.
• Security: Stocks and receivables as primary security; collateral security such as residential/commercial property may be required.

2. Term Loans

• Purpose: For long-term capital investment like building factory premises, infrastructure improvement, and modernization.
• Features: High loan amount disbursed in a lump sum; repayment period of 7 to 20 years.
• Interest Rate: Based on company profile, credit rating, loan amount, and period.
• Security: Assets created from the finance and collateral security like residential/commercial property.
• Requirements: Detailed project plan and business charter.

3. Invoice Financing

• Purpose: To manage liquidity during the time gap between raising an invoice and receiving payment (60 to 90 days).
• Features: Up to 80% of the invoice value provided as working capital, remaining 20% upon payment receipt.
• Charges: Processing charges and interest as per lender guidelines.

4. Equipment Financing

• Purpose: To finance mandatory equipment for manufacturing or business operations.
• Types of Equipment: Office, healthcare, medical, and construction equipment.
• Features: Project-based funding with competitive interest rates; loan amount can exceed ₹100 Crores.
• Repayment: 3 to 7 years.
• Security: Assets created from the finance and collateral security may be required.

5. Pradhan Mantri Mudra Yojana (PMMY)

• Purpose: To encourage entrepreneurship and create employment in the MSME sector.
• Loan Amount: Between ₹50,000 to ₹10 Lakhs.
• Eligibility: Service and manufacturing units.

6. Stand-up India

• Purpose: To support new ventures by Scheduled Caste/Scheduled Tribe individuals and women entrepreneurs.
• Eligibility: Entrepreneurs with major shareholding in the firm/company from the SC/ST category or women.

These various types of business loans cater to different needs, from managing day-to-day operations to long-term capital investments, helping businesses grow and expand.

• 1. Age:
     • The applicant or promoters of the business should be between 21 to 65 years old.

  2. Business Type:

     • Eligible entities include proprietorship/partnership firms, private limited companies, and self-employed individuals/professionals.
     • The business should be engaged in manufacturing, services, or trading.

  3. Business Vintage:

     • The business should have a minimum vintage of 3 years.

  4. Turnover:

     • A minimum business turnover and minimum annual turnover as per the ITR (Income Tax Return) are required.
     • The specific turnover requirements vary by lender.

  5. Profitability:

     • The firm/company should be profit-making for at least 1 year.

  Meeting these criteria increases the chances of approval for a business loan and helps in securing the necessary funds for business growth and operations.

1. Processing Charges:

   • Up to 3.5% of the loan amount + GST.
   • Charged for processing the loan application and related documentation.

2. Foreclosure Charges:

   • Up to 6% of the outstanding loan amount.
   • Applicable if the borrower decides to repay the loan before the agreed tenure.

3. Delayed Payment Penalty:

   • 2% onwards over and above the normal rate of interest on the overdue amount for the overdue period.
   • Charged for late payments on the loan.

Other Possible Charges

• Documentation Charges: Fees for preparing and processing legal documents.
• Cheque Dishonour Charges: Penalties for bounced cheques.
• Repayment Mode Swap Charges: Fees for changing the repayment mode (e.g., from cheque to electronic transfer).
• Charges for Duplicate NOC: Fees for issuing a duplicate No Objection Certificate (NOC).
• Cancellation Charges: Fees if the borrower cancels the loan after approval.

Understanding these charges can help you manage the cost of the loan effectively and avoid unexpected expenses.

1. Prepare a Business Charter:

   • Outline your business plans for the next few years.
   • Include growth strategies, projected financial statements, and expansion plans.

2. Check Credit Scores:

   • Ensure the promoters and the company have good credit scores.
   • A higher credit score improves loan eligibility and can secure better interest rates.

3. Determine Loan Quantum:

   • Decide the exact amount needed for your business requirements.
   • Knowing the right quantum of loan is crucial for the application process.

4. Market Research:

   • Research various business loan options available in the market.
   • Understand different types of loans, their features, and benefits.

5. Shortlist Options:

   • Select loan options that suit your business needs.
   • Compare interest rates, processing fees, and other associated charges.

6. Lender Selection:

   • Choose lenders with straightforward and quick approval procedures.
   • Consider banks or financial institutions with good reputations and favorable terms.

7. Document Preparation:

   • Be aware of the required documents for the loan application.
   • Gather and organize all necessary documents to streamline the application process.

1. Easier Approval:

   • Good credit history simplifies loan approval.

2. Benefits:

   • Lower interest rates.
   • Faster approvals.
   • Eligibility for higher loan amounts.

1. Credit Score:

   • The credit score of both the company and the promoters is crucial.
   • A good credit score indicates financial discipline and positively influences the credit decision.

2. Financial Statements:

   • Submit the balance sheet and profit & loss account for the last 3 years.
   • Provide projected financial statements for the next year.
   • These documents offer insight into the company’s income generation and overall performance.

3. Debt Service Coverage Ratio (DSCR):

   • DSCR measures the company’s ability to repay its debt.
   • The ideal DSCR should be between 1 and 1.5, indicating sufficient cash flow to cover debt obligations.

Part-Payment Facility:

• Eligibility: Part-payment of a business loan is permitted after a certain lock-in period.
• Frequency: The number of times part-payment can be made depends on the lender.
• Charges: Part-payment charges typically range from 2% to 4% of the part-paid amount.

Benefits of Part-Payment:

• Reduces the principal amount, thereby lowering future interest payments.
• Provides flexibility in managing loan repayment based on cash flow.

Business Loans should be paid in Equated Monthly Instalments( EMIs) for which benefit instructions have to be given.

Yes, A few banks do give a dropline overdraft feature against the security of the steadfast property.

For working capital finance, the prepayment will be on demand. It’s typically for a period of 6 to 12 months with a farther renewal installation on an periodic review. For term loans, the prepayment period will vary from 3 times to 20 times depending on the design for which the finance is profited.