June 21, 2017
Indian SMEs are playing a critical role in the Indian economy by contributing to 8% of the country's GDP, 45% of the manufacturing output, 40% of exports, employing over 80 million people and creating 1 million jobs annually. Unlike large institutions, SMEs can render large employment opportunities at comparatively lower cost of capital. The Indian government knows that it is such businesses that will drive growth, progress and development in rural areas. This is why the government has laid great emphasis on the SMEs sector in the current budget. SMEs are significantly contributing to economic growth, yet traditional banks do not look at SMEs as a viable business proposition. They have an impression that providing loans to such businesses could be risky.
Banks' Eligibility Criteria Hold SMEs Back
Indian SMEs are constantly under the burden of insufficient funds. Traditional banks offer loans to these enterprises, but with demands of collateral. Majority of the banks fail to analyse the creditworthiness of the SMEs. They are not sure of an SME's capacity to pay back the loan on time. Some of the key reasons why SMEs fail to get financial support from banks include:
1. SMEs Perceived as Risky: Traditional banks have put SMEs in the category of a high risk sector because of their low credit rating, low turnover, higher rate of diversion of funds, etc.
2. Small Ticket Size: SMEs often look for short term business loans of low amounts, hence apply for small ticket size of loan, which is unacceptable for most banks. These institutions typically don't like to entertain a low revenue client that incurs high transaction costs. This makes traditional banking institutions refrain from financing small businesses.
3. No Collateral: Indian banks and unorganised lenders prefer giving loans to companies or individuals who offer them the best collateral, which could be residential or commercial property. SME owners usually do not have such assets, crushing the scope of growth for these small companies.
Short Term Business Loans as an Aid
NBFCs with their online presence are making it easier for the asset light SMEs and entrepreneurs to receive easy and fast business loans. Unlike traditional banking institutions, these NBFCs analyse the credit worthiness of the SMEs using analytics and other scanning metrics. These metrics include the SME's sales, fulfilment and payment records. With the smart use of technology, Fintech lenders are able to disburse loans in just 72 hours. This trend is picking up at a rapid pace, offering SMEs a convenient option to access funds easily and quickly.
Other than using technology innovatively and simplifying the lending process, these alternate lenders have reduced borrowing costs, while providing price transparency, enhancing speed and most importantly, improving the customer experience.
Things to Know about Short Term Loans
As discussed, most SMEs applying for a loan for new business do not have any collateral. FinTech lenders understand this and hence offer unsecured loans, without the need for the business to pledge any assets as collateral. Interestingly, the repayment of the loan is linked to the payments received by the company from its clients.
1. Online Loan Application: Although traditional banks provide online access to customers for their loan application form, they still need to download the form, fill it and then submit them physically to the bank's branch. Banks require the owner to make several visits and spend hours just to complete the application process. On the contrary, FinTech companies, with their mobile apps, allow small businesses to apply for a loan online, where you can simply fill the fo
rm online and upload all the required documents, from anywhere and at anytime. The application process is completed in just 10 minutes, given the business owner has kept the required document handy, making the entire application process simple.
2. Fewer Documents Required: Unlike traditional financial institutions, which rely completely on extensive documentation, FinTech lenders have made the application process hassle-free, requiring only a few documents to be furnished at the time of the application online.
3. Flexibility in Loan Size: Every SME works differently, having different working capital needs, hence requires different loan amounts at different times. Depending on the size of the business and the reason for which working capital is required, be it expansion or growth, the amount would vary. FinTech lenders provide small loans for businesses in India that could be as low as ₹1 lakh to as high as ₹3 crore.
4. Fast Approvals: One of the major disadvantages SMEs face when applying for loan with a traditional financing institution is that they may take around 8 to 12 weeks just to let the business know whether the loan application has been approved or not. Not only SMEs, but for any business in India, timing of receiving funds is crucial. FinTech firms are capable of determining the creditworthiness of the company in a matter of hours disburse funds within a few days.
5. Short Yet Flexible Loan Tenure: Depending on the business model of the company, FinTech lenders offer flexible repayment plans, ranging between 30 to 180 days, whereas traditional banking institutions have fixed loan tenures.
6. No Prepayment Penalty: There are situations when a company has received the funds to repay the loan earlier than the maturity period. However, banks typically either do not permit prepayment or levy a charge on prepayment. On the other hand, FinTech lenders permit prepayment without levying any penalties.
Stories by Ankit Shrivastava