The development of any nation depends on how convenient it is to do a business there. There are several aspects that one has to look before starting to work towards one’s dream. They are government policies, administrative support system, access to funds, access to resources and social environment. We are going to discuss one of these aspects which is; access to funds. In the recent scenario, the government has been proactively taking steps to promote the habit of self-employment in the citizens. In its fight against the evil named unemployment, the Indian government has always encouraged people to start their own business and generate employment for others.
Here we are going to discuss all types of business loans for almost all types of businesses. So, stay tuned….
1.Loan against property (LAP)
If you have a property in your name, either residential or commercial, then LAP is the best business loan option for you. There is nothing wrong in generating funds for your business if you have a property to keep as a security. In LAP, you can get the most of your property value as a loan, provided it is not already mortgaged. Through this option, you can easily avail a lumpsum amount of money for initial investment in the business or the expansion of your business, whichever is the case.
The other best features of LAP are that the banks always consider the latest market value of the property for loan and you can avail the loan on pari passu. It means that if you already have a home loan going on, the maximum portion of which has been repaid by you, then you can take the LAP against the freed part of your property.
The bank overdraft is a type of loan which is given only to current account holders. This is the most suitable business loan for those who have daily working capital requirements. Such businesses are mainly manufacturing and trading units. In bank overdrafts, the bank allows the businessman to withdraw some more amounts from his current account than the actual balance available. The bank charges some interest against the extra amount it allows to withdraw for the tenure up to which the amount is deposited back into the account.
This is also a secured loan. You can keep your residential property, commercial property or the bank fixed deposits as a security against the loan. On the basis of the value of the security as well as the performance of your business, a limit is set by the bank up to only which you are allowed to withdraw. The best part of such type of loan is that you are only supposed to pay interest on the amount you overdraw and only for the time up to which the account stayed overdrawn.
3. Cash Credit
Cash credit is similar to bank overdraft. It is a secured loan. You can overdraw a certain limit of the amount from your current account to meet your working capital expenses. The interest will be charged only on the amount withdrawn and only for the time it was withdrawn. But there is one basic difference. The credit limit on cash credit is revised on a quarterly basis depending upon the stock limit of the business.
4. Bank Guarantee-
The requirement for Bank Guarantee arose when there is a lack of trust element between two business parties. The situation such as when the buyer of materials is not confident about receiving the accurate and appropriate consignment after making partial or full payment. And also when the seller of the goods is not confident about receiving the payment after delivering the consignment. This happens with those businesses which are remotely located from each other. Therefore, to counter this problem from their path of business, they both contact a single organization whom they can both trust, which is a bank.
The bank issues a bank guarantee to the buyer of an amount depending on the security he/she can provide. The buyer then gives it to the seller who then submits it to its bank. On buyer’s failure to make the payment the seller’s bank will take money from the buyer’s bank which it pays to the seller. In this way, the bank guarantee has made business easier for many.
5. Letter of Credit (LC)
The basic feature of LC is the same as a bank guarantee. The difference is that LC is more like a documented commitment to make payment on the completion of a certain document. Bank Guarantee comes into the picture on the failure of payment by a party while the letter of credit ensures that the payment takes place as planned between the parties. LCs are mostly used for the international transaction while Bank Guarantees are mostly used.
The abovementioned are the types of business loans given in India. Now let us discuss what are all the special lending schemes for Medium Small and Microenterprise groups of India.
Credit schemes for start-ups in India
The major problem faced by small businesses and budding entrepreneurs is that of business loans. Their requirements are mostly for small amounts, yet they have to face a lot of difficulty owing to the absence of security and business track record. Therefore, the government has taken various empathetic steps for them. Some of them are:
Micro Units Development and Refinance Agency Bank is a subsidiary of SIDBI and serves as a lending institution in India. It provides low-interest rate loans to micro-finance companies and NBFCs so that they can further lend it to MSME groups. There are three categories of unsecured loans given through Mudra Bank.
- Shishu– The maximum loan amount of up to Rs. 50,000.
- Kishore– The maximum loan amount of up to Rs. 5 lakh.
- Tarun– The maximum loan amount of up to Rs. 10 lakh.
Priority Sector Lending
In order to promote MSME sector, small businesses or businesses that indulge in agriculture and other allied activities, Reserve Bank of India has specified banks to lend them. Under Priority Sector Lending there is also a category of weaker sections which provide loans to the following:
- Farmers (small and marginal)
- Self-help groups
- Cottage industries
- Individual Women
- Scheduled Caste and Scheduled Tribes
- Beneficiaries of Swarna Jayanti Shahari Rozgar Yojna
- Account holders of Pradhan Mantri Jan Dhan Yojna
- Beneficiaries of Rehabilitation of Manual Scavengers
- Renewable energy sector
The Credit guarantee scheme
The government of India initiative to provide adequate and timely credit facilities to small business groups. The eligible Scheduled commercial banks and regional rural banks can provide the collateral-free loan to small and medium enterprises. In this scheme, both the term loan as well as working capital credit facility is provided. A maximum amount of rupees one crore can be given to one business under this scheme.
The stand-up India scheme
This is a revolutionary step taken by the Indian government to empower at least one Scheduled Caste, Scheduled Tribe or a woman entrepreneur per bank branch. Under this scheme, the government has made it mandatory for the banks to provide the credit facility to at least one such business in their vicinity. The minimum loan amount in this scheme is rupees 10 lakhs and the maximum is rupees 1 crore. The idea behind it is to develop a greenfield enterprise. Even a non-individual business can avail a loan under this scheme provided that at least 51% of the stake is being held by the SC/STs or women.
Bank Credit Facilitation Scheme
As the name suggests itself this is a scheme under National Small Industries Corporation, which provides hand-held services to the MSME borrowers. The NSIC has gone under MoU with the various public as well as private sector banks to facilitate the financing procedure. The scheme provides a complete support system to the MSME borrowers to access loans. Apart from that it also helps in the documentation and also in preparing and submitting a proper proposal to the bank.
No doubt that the current time is witnessing a lot of innovative steps to promote small and micro businesses in India. The focus is not only on lending but also on timely lending. As a result of which the finance ministry of the nation has launched a new portal which provides loan approval in a time as short as one hour. Read more about the same here.