The economy of SMEs

Funding small and medium enterprises or SMEs has become a thriving business for financiers in recent years. Unlike the previous decade, banks have expanded their credit options to SMEs by regularly updating their product lines, services and even opening special counters.

Business loans can be applied for a variety of requirements such as starting new ventures, expansions, new purchase, working capital requirement, vendor and dealer financing, bill discounting etc.

Business loan categories

Term Loans: There are different types of term loans today - short term loans, long term loans and intermediate loans, which the entrepreneur can avail upon his requirement and financial position. The maximum tenure of a short term loan will be three years and for a long term loan, 10-15 years. There will be slight interest variations for each.

Term loans are of two types - secured and unsecured. In secured loans, the collateral can be a property, business premise or machinery and will usually have lower interest rates than an unsecured one.

Overdrafts: The word overdraft means overdrawing from your current account. In other words, the account holder withdraws more money from the account than what has been deposited.  If the amount overdrawn is within the limits of a prior agreement, the interest will be charged at an agreed rate. A higher interest rate is applicable if it exceeds the limits. As an overdraft can be covered with the next deposit, it is an ideal source of temporary funding.

Bill Discounting: In this process you get instant cash on large purchases or the credit sales made by discounting your purchase or sales bill at your bank. You need to produce the documents which authenticate the transaction like trade invoices challans, truck receipts, railway receipts, bill of lading etc.

Letter of Credit: Letters of credit are used primarily in international trades of significant value. They are also used in the land development process. The parties to a letter of credit are the issuing bank of whom the applicant is a client, a beneficiary who is to receive the money, and the advising bank for which the beneficiary is a client. As a letter of credit is often used in international finance where buyer and seller do not know each other, the business transaction will be facilitated using the bank's credit-worthiness.

The documents a beneficiary might have to reproduce in order to receive the payment includes a commercial invoice, bill of lading, and an insurance policy that covers the goods in transit.

For the fairer sex

Banks now have a slew of attractive lending schemes for women entrepreneurs. Many schemes that are exclusively for women provide relief in terms of collateral security and interest rates. Interest rates vary in most cases from 0.25-1 per cent on applicable conditions.

Some banks have special cells for women entrepreneurs. Besides consulting, here they provide training, counselling and at times avenues for showcasing and marketing their products. They give a more realistic view of the businesses and often give references of similar businesses and the issues they were facing initially.

If women's ownership in a company is less than 50 per cent, the benefits of women's schemes cannot be availed.

The right approach

With business loans, your credit worthiness is evaluated by your repayment capacity and reliability, As would be the case in any other loans. To do this , banks will analyse the financial statements and records of your business.

The capital money you have personally invested in your business is also important to the bank as it is reflective of how confident you are about your own business.

Those venturing into business for the first time, might find it a bit tough to convince the bank that you are a trustworthy client. Banks in such cases will look into your background, credit history, assets and liabilities, education, business experience, business plan and its feasibility. A clearly prepared and well-researched business plan shows how dedicated and passionate you are about your business.

For new entrepreneurs banks are even working out schemes to sanction loans on the basis of a good track record in their existing or extinguished loans. But at the same time, taking too many loans would restrict your credit-worthiness and might give the impression that you have too many liabilities.

Having insurance attached to your property / equipment is a cushion for credit managers to sanction the loan as the bank always looks out for the security and risk patterns attached with each business.

A clear, professional business plan is very important before approaching a bank. You should also have a thorough knowledge about the target market for your products and your operational methods.

Banks are also focusing on long-term working capital loans for SMEs and the expansion of credit facilities to new geographical areas like the lesser-developed states, thereby promoting inclusive growth of SMEs across the country. The Government is also taking considerable initiatives to step up credit flow to SMEs.

(The author is CEO, BankBazaar.com )

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