Business Loan

Q: How to raise money for a business without a loan?

Ans. Raising money without a loan may be difficult, but it is not impossible. There are a few ways available through which you can raise money without taking a loan like: Equity Financing, Invoice Finance, Asset Finance, Business Cash Advance/Merchant Cash Advance, Peer 2 Peer (P2P) Lending, Investors (Private, Angel), Grants, Crowdfunding, Family and friends, and Savings.

Just like human beings need oxygen to survive, every business, big or small, needs funds to survive and grow. A business needs funds to procure raw material, pay salaries to employees, and meet operating expenses, among others.

Arranging funds is not a problem for cash-rich companies, but for most companies, especially MSME, there is always a need for creating a fund flow so that there are no hurdles in production and other business operations. To fund these regular fund requirements, MSMEs are always on the lookout for better and ‘friendly’ sources of finance. Traditionally, MSMEs have relied upon taking loans from Banks or NBFCs (business loans) to meet their requirements. However, in recent times, some more techniques are gaining popularity. One such technique is supply chain financing.

What is a business loan?

A business loan may be defined as financial support offered by Banks (government and private) or NBFCs to meet the funds’ requirements of an entrepreneur. The banks or NBFC extend these business loans to individuals, MSMEs, business owners, entrepreneurs, and several other entities.

Depending upon the exact requirement, the loans are termed accordingly. For example, a loan extended to an MSME is called an MSME business loan. These business loans may be secured loans or unsecured loans.

Secured and Unsecured Business Loans:

As the name suggests, secured loans are a type of loan that requires the borrower to offer some collateral as a security to the lender. Only once the lender is assured of the collateral security, the secured loan is issued.

On the other hand, unsecured loans do not have any pre-requirement of submitting any collateral as security. Most financial institutions offer unsecured business loans to their clients.

Types of Business Loans:

Depending upon the requirement, there are different types of business loans. These business loans may be classified as working capital loans, business line of credit (LOC), Invoice Discounting, and Equipment Financing, among others.

Documents Required for Business Loan Application

The various documents required to avail of a business loan are as follows:

1. Loan application form, duly filled, along with passport-sized photographs

2. KYC Documents of the applicant – Identity proof like Aadhar card, PAN card, Passport, Driving License, Voter ID card, and address proof like utility bills (Water/Electricity Bills). The bill must not be more than 3 months old.

3. Last 1 years’ bank statement

4. Copy of Non-Collateral Overdraft, if any.

5. Copy of Business Incorporation

6. Any other document, if asked by the lender.

In addition to these documentation requirements, the following are the eligibility criteria for availing business loan:

Age of business: Minimum 1 year or more

Minimum Annual Turnover: Rs. 12 lakh for existing businesses

Minimum Credit Score: 750

The applicant should not have a history of defaulting on any loan.

Benefits of Business Loans:

Some of the benefits of business loans are:

Quick loan processing: Compared to other traditional methods of financing, business loans get approved faster. A loan received in time can help you benefit from business opportunities and grow your business and profits.

Flexibility: Unlike other traditional finance options, business loans are flexible. They don’t dictate how you should use the loan amount. They are just concerned with timely repayments.

Reasonable interest rates: The interest rates on business loans are lower compared to other traditional loan options.

No collateral required: Business loans are usually provided without asking for any collateral security, provided you fulfil their eligibility criteria.

Preserving your business ownership: Since the business loans are unsecured, you do not risk valuable company assets or stocks to get the loan.

Multiple loan options: Depending upon your exact requirement, various types of business loans suit your need perfectly.

Disadvantages of Business Loans:

While business loans are an easy way to finance your requirements, there are some disadvantages to going for a business loan.

Strict eligibility criteria: As mentioned above, all banks and NBFCs have eligibility criteria, and a business needs to fulfill the criteria before getting the business loan. Not all companies can fulfill those criteria. Banks have strict rules and conditions for accepting or rejecting a loan application. And many of the rules may be subjective in nature. Hence, when a business, especially a start-up or an MSME, applies for a business, there is no surety that the bank will grant them the loan. This may discourage many budding entrepreneurs.

Often require collateral as security: Most banks offer secured loans, which mean they ask the business for collateral security. As per the agreement, if the company is not able to pay the loan on time, the bank has the legal right to seize the asset. If your business does not grow as per your expectations or is down because of situations like Covid, you may have challenges in making the repayments. In that case, you may end up losing your assets.

You may not get the entire money you want: The banks judge your need while granting the business loans. They may underestimate your requirement and sanction loan amount what they feel is right and accordingly offer 70% to 80% of the loan amount asked. This can be very frustrating for the business owner, who had already invested a lot in the business plan.

Dependent on collection: Your repayment ability is dependent on the payments you collect from your customers. In case there is any delay in getting the payments, you may land in trouble.

May trigger a cycle of business debt: The biggest drawback of a business loan is that, if not appropriately managed, a business loan may spark off a cycle of debt, where a business may be forced to take a new loan to pay off the old loan.

Supply Chain Financing – The modern way out

Supply Chain Finance, also called Supplier Finance or “Reverse Factoring”, is an easy and simple way to get funds to meet the working capital requirements of a business. It helps a company get quicker payments for their invoices. This method usually involves a third party or lender (usually a bank or financial institution) who finances the business on behalf of the end customer.

Simply speaking, in supply chain finance, suppliers sell their high-ticket invoices to lenders (banks, financial institutions, or NBFCs) at a discounted rate to get short term credit. This receipt of this money, much before the invoice due date, gives breathing space to the business and helps them fulfill their operating commitments.

Benefits of Supply Chain Financing over business loans:

Every business wants to get paid as soon as possible. This may not be a problem with cash-rich companies, but for most MSMEs, getting a regular fund flow prevents them from getting chocked. Given below are some benefits of supply chain financing:

Provides capital without repayment schedule: In the case of a traditional business loan, one has to sign certain documents and agree to pay as per the schedule given. Whether or not you receive payments from your customers, you have to pay the bank on time. In contrast, supply chain financing unlocks your business capital by simply allowing you to get a quick payment on account of your accounts receivables. The financing company buys your invoices, pays a major amount, and then pays the remaining amount later once your customer makes the complete payment. This way, the business gets paid quickly without having to worry about repayment of the amount.

Available when you need capital: The traditional business loan process has an ironic angle to it. The banks easily give business loans to those who don’t need them and reject the loan applications of those who actually need them. In doing so, they evaluate your income and ability to repay the loan independently and then process the application accordingly. So, if your business does not fit into their scheme of things, they may reject your loan application. On the other hand, supply chain financing helps you just when you need the additional cash. The financial agency buys your invoice, at a discount, on your behalf so that your money is not blocked for that period.

Steady source of funding: A business requires a regular fund flow to operate. In the case of a traditional business loan, one may get a large amount in one go. But, once this amount is over, it is not easy to get another loan. Simply speaking, a business loan is like injecting money into your business to handle a particular business requirement. In stark contrast to this, supply chain financing can act as a constant source of find flow for your business. As long as you continue production, selling, and raising invoices, the financing companies can continue buying your invoices and provide a regular fund flow.

No lengthy process and not much documentation: In the case of a business loan, one has to submit an application, submit some documents, pledge some assets, and then hope to get the loan. But in the case of supply chain financing, the process is simple. Your invoices, once approved by the customer, are good enough to qualify as documents as well as security.

A business loan is an easy and effective way of meeting your short-term business needs. However, supply chain financing does it better. It lets you run your business without any interruptions. You may opt for the facility when you need it and stop it as and when you want it. This makes this a highly flexible and reliable method of financing for businesses that require continued working capital. So, if you are getting stuck somewhere and need funds for a shorter time, then supply chain financing makes much financial sense.

To know more about how supply chain financing can help overcome various business challenges, give us a call. We will be glad to help you.

FAQs

Q.1 What can I use a business loan for?

Ans. Business loans can be used to expand your business and introduce new products or services. It can be used for the purchase of raw materials and payment of salaries to employees, it can also be used for the purchase of machinery, furniture, opening of stores and many more.

Q.2 Who can apply for a business loan?

Ans. Anyone who wants to start a business or any business can apply for a business loan, but getting a loan is not that easy. There are certain eligibility criteria and documents required for availing a business loan. Any individual or business that meets all the requirements can easily get a business loan.

Q.3 What is a business loan?

Ans. A business loan is a form of funding a business has been unable to get elsewhere. A business loan is a type of loan that a business can apply for to finance its daily operations, expansion plans, or new business ventures. It is one of the most convenient ways to raise capital for a business, especially a startup or small business.

Q.4 Is it good to take out loans for business?

Ans. Taking out a loan for a business is good if you can repay them timely. You can take a loan from your institution and from a bank. Loans from banks are generally easier to get, but the interest rates charged are quite high.

Q.5 Can I get a business loan with a 500 credit score?

Ans. Bad credit score doesn’t mean you get a business loan. A person with a credit score of 500 can get a loan. Loan providers who do not require a credit check will be more willing to lend to someone who is in dire need of money than someone with a good credit score.

Q.6 Can a small business borrow money?

Ans. Banks can lend money to small businesses if the owners have collateral. Most business owners don’t have any collateral because they don’t own land or any other physical assets. In such a situation, it is very difficult for a small business owner to get a loan from the bank.

Q.7 How to raise money for a business without a loan?

Ans. Raising money without a loan may be difficult, but it is not impossible. There are a few ways available through which you can raise money without taking a loan like: Equity Financing, Invoice Finance, Asset Finance, Business Cash Advance/Merchant Cash Advance, Peer 2 Peer (P2P) Lending, Investors (Private, Angel), Grants, Crowdfunding, Family and friends, and Savings.