An entrepreneur's guide
The driving force behind every successful entrepreneur has always been his/her desire to work independently and churn profits through innovative ideas. In order to materialize the ideas the entrepreneur should have a sound financial backing. Often, approaching a bank for a loan has been a tedious affair
for a new entrepreneur. This article will throw light on some of the concepts related to applying for a loan.
Types of loans
There are broadly two kinds of loans available for an entrepreneur: Term loan and Working Capital loan. Working capital loans are short term loans, utilized in the day to day business transactions. For example, it is used for purchasing stock for which the entrepreneur has to produce a stock statement every month. Term loans on the other hand are long term loans given out for a period of 3 to a maximum of 7 years. This type of loan is used for investing in fixed assets such as establishing units, buying equipments, acquiring infrastructure, etc.
After identifying the kind of loan he wants, he can approach the bank with the required set of documents. It is here where the entrepreneur needs to be prepared. Banks often reject loan applications from start-ups, on the grounds of inexperience on part of the entrepreneur, no collateral security, improper project report, etc. He needs to have a clear idea of the kind of business he wants to start and also take into consideration the market demand for his product in the particular location.
List of documents required by banks
Feasibility/Project report on various aspects of the venture
|If it is a Non-manufacturing unit||If it is a manufacturing unit|
|Road transport permit||License from the Government|
|Sales Tax number||Registration with the District Industries Centera|
|Pin number||Clearance from pollution control board|
|Feasibility report from the electricity board|
|Balance sheet certified by Chartered Accountant|
|NOC from local authority|
|Other documents required for security against loan (Land and Building, Plant and Machinery)|
"Usually in case of new projects it is difficult to assess their needs. The two main things we look for are skill and one's own stake in the company. Being a co-operative bank, we ask for 100% collateral security," says Crijos Francis Barretto, General Manager, Bassein Catholic Co-operative Bank.
A project report gives an overview of the business. It gives an introduction to the entrepreneur's project, justifying how it can be a profitable venture followed by process of manufacture and market potential surveys, etc.
|Products & Services by Banks|
|Term Loan||Fixed tenor loans for business expansions||MSEs|
|Working Capital Facilities|
|Cash Credit/Overdraft||To meet the complete working capital needs of the business||MSEs|
|Foreign Trade Facilities|
|Export Packing Credit||Finance is provided in Indian or foreign currency depending upon the need of the borrower.||Exporters|
|Post Shipment Credit||Exporters|
|Bill Discounting under LC||Bill discounting is available to bridge the short term finance requirements.||Exporters|
|For Retail Outlets|
|Merchant Enterprises Over draft/Term Loan||OD/TL against credit card receivables.||Retailers, Hotels, Restaurants|
|Non Fund Facilities|
|Letter of Credit||Bank extend Domestic and Foreign LCs.||All MSEs|
|Bank Guarantee||Banks issue various types of guarantees - performance, financial, bid bond etc.||Suppliers/Service Providers/Construction and others|
|Credit Guarantee Scheme||Collateral free loans under the Credit Guarantee Scheme of Credit Guarantee Trust are available for Micro and Small Enterprises.||MSEs|
|Technology upgrade scheme of MoFPI||Under this scheme the bank provides assistance to food processing units in processing their subsidy claims.||MSEs in Food Processing|
|Technology Up gradation Fund Scheme (TUFS)-Textiles||From Project Lending Institutions (PLI) for the TUFS scheme of Ministry of Textiles and all eligible customers availing loan from the bank can apply for the subsidy.||MSEs in Textile sector|
|Funded Interest Term Loans(FITL)||While restructuring the loan repayment, interest is bundled into a separate term loan with its own compounding interest||MSEs|
The project report submitted to the bank is a little more detailed and contains the feasibility report. This is also known as the Detailed Project Report (DPR) or Techno Economic Feasibility Report.
|Repayments and Default scenarios - Defaults and Repayments|
|Failure in payment of installments by the borrower as outlined by the banks results in loan defaults. In such cases, instead of running away, approaching the banks in a good idea. “If we see that it is not a willful default, after he furnishes proof showing that it was beyond his capacity to repay, we restructure the loan to extend it to a period of 1 year. This is according to RBI guidelines.” says RK Mohanty, Chief Manager, Canara Bank. He also adds that after the recession, banks have become wary of giving out loans to the SME sector and prefer giving out to the priority sector.
Suresh Balasubramaniam, Head- Trade and Advances, Dhanlaxmi Bank, feels that the startups are actually doing well now. “Startups in the service sector are doing well. Usually if a start up can survive in the first two years then it can pick up well in the future,” says Balasubramaniam. The rescheduling of repayments is done taking into consideration the industry and the capability of the person to repay. “Since the last one year, we have seen defaults in 1-2% of the cases, which have become non-performing assets. We prevent this by being selective and by not giving so much credit” says Tessy Sebastian, Assistant General Manager, Catholic Syrian Bank.
The Experienced Entrepreneur
Generally, an entrepreneur with collateral finds it easy to get a loan. Loans secured against collateral come at lower interest rates. However, for entrepreneurs who do not have anything to offer as collateral, securing loan becomes heavily dependent on the project report. The bank makes a careful assessment of the report, analyzes demand and supply gap, verifies professional qualifications of the promoter, etc. "The thing with banks is, they lend money to persons who can prove that they do not need it. There is a different kind of relationship you need to develop with the banker. And the way banks look at start ups, it is more like they are certain that they are being approached with the intention that they are going to get cheated. There is no trust at all. And in most of the cases the banks are right." says RS Hiremath, MD, Flexitron Manufacturing. He also adds that, "it is a simple process and if the right documents are provided at the right time, the loan can be sanctioned in less than 10 days."
However, Mahesh Sharma, who runs Kryzliz, a web design company, says, "no start up can hope to acquire a loan without having collateral. Earlier, SIDBI used to ask for last two years' audit report, but now they ask for reports of last three years. They keep changing the terms. I had approached Reliance too, they rejected my loan application because the operations were to be carried on rented premises,"
said Mr Sharma.
Past work experience also helps the entrepreneur in getting the loan. "I started my business with the bank after having 20 years of work experience and I have never defaulted with the bank. My business has grown ever since," says K Channa Bassapa, Davengere Wire Rope Industries Pvt. Ltd.
Shradha Mohanty with inputs from Nimesh Sharma & Shinjini Ganguli
written by mr.krishnan doddamani, October 27, 2010
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