With an economic growth rate of close to 7.5%, India today is among the fastest growing economies of the world. However, to sustain this growth in the near future, the country needs to embrace all sections of the economy on its growth journey. The SME segment is one such category that impacts a huge population in the country and is spread across large swathes of the land, but is sadly one of the laggards as far as growth is concerned.
Despite efforts by successive governments, this section of the Indian economy has remained largely unorganised and in perpetual need of capital loan. One of the foremost reasons is that the segment largely comprises business units that are run as family businesses, and have seldom formalised their business processes or brought about transparency in their operations. Consequently, their business funding has remained uncertain and traditional finance institutions such as banks and other non-banking finance companies (NBFC) have been reluctant to provide a loan for business without security to them.
Traditionally, small businesses have been at the mercy of informal banking channels such as local moneylenders who charge exorbitant interest rates and operate without any transparency in providing business loan in India. A perpetual solution to this unfortunate state of affairs is the need of the hour, with the Make in India and related campaigns initiated by the government manifesting a favourable climate for the growth of SMEs in India. SMEs necessarily need access to adequate loans for business without security for their growth.
Here are five tips that SMEs should consider before applying for a loan for business without security, to infuse funds for accelerating their business growth:
- Consider taking business loan in India from FinTech lenders: In the last few years, we have seen the entry of new age FinTech companies whose lending operations are completely defined by technology. They use tools such as Big Data and Analytics to process a capital loan application. The loan processing is faster on this account, and once approved, the loan for business without security is credited to the bank account of the borrower within three working days. Compared to banks, these companies do not require piles of documentation in paper to support a capital loan application. The entire process is conducted online and you could apply for a business loan in India any time and from anywhere.
- Justify the need for taking a loan for business without security: Short-term loans are meant to address an urgent business need and therefore you should be able to clearly justify your need before applying for one. For instance, a manufacturer might need a working capital loan to purchase new equipment to expand their operations. They will need such funds to bridge the gap between order delivery and invoice payments from their customers. Similarly, a retailer might want to pile up their stocks before the approaching festival season or might want to make the most of a new business opportunity for which it needs a loan for business without security.
- Identify the right amount for the business loan in India: This calculation should be done diligently and under no circumstances should you overestimate or underestimate the business requirement. Applying for just the adequate amount of loan for business without security highlights the seriousness with which you pursue your business objectives and convinces the lender about the genuineness of your business need. Moreover, a loan for business without security comes at a higher interest rate and you should not incur needless costs by pitching for a higher amount of capital loan. Further, a business loan in India needs to be repaid as per schedule and therefore your loan for business without security should never become unmanageably high when it is time for repayment.
- Maintain a healthy credit score: A business will necessarily need to seek capital loan repeatedly, and for getting loans approved on time, it is crucial to maintain a healthy credit score. Make sure you maintain a reasonable amount of loan for business without security and make timely repayments. Also, avoid taking a capital loan unnecessarily, which can lead to debt traps in the future. You need to maintain a clean slate not only for business loans, but also for your personal loans. Such discipline will help boost your credit rating and ensure that you always get access to quality loan for business without security whenever a business need arises.
- Choose the right financial product: Term finance is an ideal loan product for small businesses which provides urgent funds for a short-term business need. However, all loan for business without security products come at a higher interest rate and therefore you need to look for capital loan products that are tailor-made to meet your business need. For instance, if you have multiple pending invoices from blue-chip companies, you may consider availing supply chain finance. This product lets you take up to 85% of the invoice amount upfront, and the capital loan repayment can be done as and when the payment from the customer arrives.
Similarly, a retailer who receives payments from customers through credit/debit cards could look at applying for a merchant cash advance to meet any shortfall in funds. The funds so received upfront are paid back through deductions in card receivables from the bank as a specific percentage each month. Another loan for business without security, online seller finance is suitable for merchants who sell through ecommerce marketplaces. Such businesses regularly need funds to increase stocks during a sale or a business season and to increase their range of products offered. Loans designed for specific kinds of businesses not only help in reducing interest rate liability, but also are more likely to be approved faster.
A small business today can look beyond traditional finance institutions such as banks and NBFCs to new age FinTech lenders that give more weighting to a business’s potential rather than to its history or the amount of collateral it has. Moreover, they provide innovative options in business loans and their loan processing is completely transparent, based on the latest technology tools.