A growing small-scale business group hopes to expand the business and grow further. Not all small case entrepreneurs have sufficient funds to expand their business. The article discusses MSME loans, a line of credit, term loan, business loans, and collateral-free loans available to businesses to grow.
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Small businesses have a lot of opportunities but also have risks and difficulties if they want the business to grow and expand. Funding is required at crucial times at reasonable interest rates. The businesses may be from manufacturing, service, or trading industries. The type of funding depends on the type of business, funding authorities, market trends, and the amount of loan required. Loans available are available for both short and long periods. Businesses can study the various options available and select the funding suitable to them.
Type of Loans
MSME Loans: MSME loans are loans given to medium, small and micro enterprises that businesses can use for working capital purposes, purchasing new stock, or purchasing new machinery. Micro businesses are defined as businesses with an investment of Rs 1 crore and sales or turnover up to Rs 5 crore. The investment limit for a small enterprise should not exceed Rs 10 crore, and the sales up to Rs 50 crore and the limits for a medium enterprise can be up to Rs 20 crore, and the sales limit can be Rs 100 crore.
MSME loans come under priority sector lending and enjoy the benefits like lower interest rates as they encourage employment.
LOAN TERMS: The interest rates start from a low of Rs 7.65 per annum, and the minimum loan can be as low as Rs 50,000. The maximum loan period can be as long as 15 years.
Companies in the manufacturing and service sector can avail of MSME loans.
In the manufacturing sector, A micro company can have a turnover of up to Rs 25 lakh; a small company can have a turnover up to Rs 5 crore, while a medium-sized company can have a turnover up to Rs 10 crore. For the service sector, the turnover limit is Rs 10 lakh for a micro company, Rs 2 crore for a small company, and Rs 5 crore for a medium-sized company.
The documents required for availing of MSME loans are:
- Proof of income (profit and loss statement and balance sheet for the past two years).
- Proof of residence.
- Tax return copies(income tax and sales tax return copies).
If properties are offered as securities, then copies of the title deed offered as securities should be submitted. An estimated profitability statement should be given if projections are made of future growth.
HOW TO APPLY AND OTHER TERMS?
MSME loans can be applied online or by visiting the bank’s nearest branch or the non-banking finance company providing the loans. Generally, most lending institutions do not insist on any collateral security for providing loans. The government also assists MSMEs like skill development, cluster development, improvement of manufacturing competitiveness, and making the quality of products better. Other facilities for MSME entrepreneurs are financial literacy programs and rural self-employment training institutes.
COLLATERAL FREE LOANS
These loans are given without any security to be submitted by the borrower. They can be used by businessmen for various goals and can be used by individuals for personal needs like going on a holiday trip, medical treatments, and child education.
A LINE OF CREDIT
A line of credit is a facility given by banks, financial institutions, or other lending organizations to their regular customers. The customers can use it as per their needs at various times. The line of credit amount can be increased according to the requirements.
Types of a line of credit:
- A secured line of credit
This type of credit is given against particular security, against which the loan amount is sanctioned – for example, loans against equity shares. Shares of selected blue-chip companies are offered protection for securing this line of credit.
- An unsecured line of credit
This line of credit is unsecured and a higher interest rate is charged compared to the secured line of credit.
The two types of unsecured lines of credit are:
- For business purposes: Business people use this for routine working capital requirements, purchasing inventories, and even salary payments.
- For personal purposes: Individuals use this for significant household expenses like home renovation, child education, or sudden financial emergencies. It is given only to individuals with an excellent credit history.
The main advantage is that the amount does not have to be used as soon as it is sanctioned, and there is also flexibility in repaying the loans at the borrower’s convenience.
Term loans are loans for a specific purpose and are offered for a fixed tenure with fixed repayment schedules. They are given for a particular purpose, like purchasing land or machinery to expand the business.
Term loans are given against the security of land or machinery. Interest is charged on the entire loan amount, irrespective of the amount used. The main feature of term loans is they offer lower interest rates for more extended periods. Unsecured term loans can be granted for a maximum period of 5 years, while secured term loans can be sanctioned for 15 to 20 years.
Business loans are granted for small businesses that want to take advantage of a business opportunity. Advantages of taking a business loan are faster processing of loans, secured or unsecured (no security required for small business loans), and depends on the business relationship between the lender and borrower.
The borrower should be a self-employed businessman, professional, reader, or retailer between 21 and 65 years. A minimum turnover of Rs 10 lakhs is required with a business experience of 5 years overall and in the particular business for at least 3 years.
Factors affecting monthly EMIs on business loans:
- Interest rates: Interest rates play a significant role in determining monthly EMIs. Research should be done and compare different products of various banks and financial institutions.
- Loan tenure: The longer the loan tenure, the lower will be the monthly EMIs.
- Loan amounts: A higher loan amount will mean a higher monthly EMI.
Business loan EMI calculator
Business loan EMI calculators are simple, online tools that help business people who want to take business loans compare various loans without any manual work and select the best rates for business loans after comparison.
Advantages of using a business loan EMI calculator
- The main advantage is that calculations can be done instantly, entering different loan amounts and different terms at the click of a button.
- Different lenders, lending amounts, and rates can be compared easily, and the most suitable loan can be selected.
A small business person taking a business loan of Rs 1 crore for 10 years will be charged an interest rate of 10.5 percent with a monthly EMI of Rs. 1,34,935 over the loan period.
See Reference 1 below for an example of a business loan EMI calculator calculation.
Small business people have various options for funding their business. Term loans can be used by manufacturers for purchasing machinery, with financing available for the long term at attractive rates for interest. MSME loans come with training and knowledge for small businesses in their initial stage. Business loans are another option for small companies that want faster processing of loans with minimum paperwork. So the best choice should be selected after studying the possibilities.