An enterprise that has a strategic business plan for its growth but not enough cash to execute the same can approach institutional lenders for funds. There are multiple sources of procuring a working capital loan in the organised credit market. These include private and public sector banks, development banks and non-banking finance companies (NBFCs).
The digitally enabled NBFCs known as FinTech lending companies have become some of the major lenders supporting the growth of micro, small and medium enterprises (MSMEs, SMEs) around the world. In India too, the FinTech lending model is becoming popular, and start-ups find it more convenient to borrow from them as these companies offer unsecured business loans.
What kind of businesses can borrow from a FinTech company? How to apply for a FinTech SME or MSME loan? Could this be a month-long process like most other institutional lending systems? These are some of the questions that organisations not acquainted with the digital lending framework ask. And the answers bring relief to most of them.
In their mission to support the Make in India initiative, established FinTech companies are coming forward to assist as many enterprises as possible. They have a diversified array of products that include working capital loan, term loan, supply chain finance, machinery loan and other funds customised for different commercial needs.
You need to take merely 5 steps to find the best business loan type for your business requirement when you decide to approach a FinTech company for finance.
Before we further look into these five steps, here is some more information on the different types of funds provided by these digital lenders:
Working Capital Loan—This form of finance helps sustain the regular operations of any business. It is usually taken for a short term – up to 12 months – to procure additional raw materials, buy inventory, pay for utilities and to give advance payments to suppliers. Your business can use this loan as a cash cushion and manage seasonal sale fluctuations.
Term Loan—FinTech companies also offer loans for longer tenures when businesses need to make bigger investments. When the loan amount taken by an SME is approximately Rs 20 lakhs to 50 lakhs, it can be paid it back in 2- 3 years in small instalments. Term loans can be taken by any manufacturer, trader, distributor or professional service provider.
MCA Loan—A Merchant Cash Advance (MCA) loan is a funding option open to businesses that frequently accept card-based payments from their customers. The FinTech lender looks at the monthly credit or debit card receipts to determine the creditworthiness of a borrower. Eligible businesses in Indian can borrow between Rs 1 lakh and 1 crore as per their average card settlements. The loan can be paid back in 9 to 12 months.
Machinery Loan—As the name conveys this loan is procured to purchase machines and equipment used in the manufacturing processes. Businesses in construction, packaging, fabrication, and assembling of products can use these loans to overcome temporary financial roadblocks. FinTechs have flexible repayment terms for such loans.
Invoice Finance—Another customised business loan for SMEs and MSMEs, invoice financing enables businesses to borrow against their Account Receivables. If your company needs immediate cash to fund operations, but your clients will process your bills at later dates, you may be eligible to get quick invoice finance from a FinTech company.
Pay Later Loan—An SME loan in the form of a pay later finance comes with a pre-defined amount that is exclusive to each business as per its requirements and earning capacity. On this loan borrowers can make multiple draw-downs within the approved limit. They just need to pay back the sums used to reinstate the balance for further usage. It is a rolling credit product to help small businesses pay their suppliers at short notices. The top benefit of this loan is that the interest is charged only on the amount used and not the full limit approved for the borrower.
Supply Chain Finance—A tailored loan to help dealers and suppliers having business relationships with large, blue-chip companies, supply chain finance can be availed to buy inventory, improve cash flow, reduce the cost of goods sold (COGS), improve sales, and ensure the timely availability of goods for consumers. With supply chain finance, the borrowing business can reduce its dependence on the buyer while benefiting from the fluidity in its financial position.
FinTechs also offer bespoke funding for specific professions and businesses. These may be in the form of a school loan, doctor loan, online seller finance, franchise finance, petrol pump loan, restaurant loan or a loan for any other legally permissible business.
5 steps to find the best business loan type for your business requirements
When a FinTech company offers a custom loan product for your line of business/profession, it is important to identify the right kind of finance product. It is thus good to be aware of the general ways to choose the right SME or MSME loan.
- Make a note of your requirements—When your business has a good credit rating, it can be tempting to borrow a sum larger than what you need. You may want to keep a bigger cash reserve for working capital. This, however, is a wrong strategy. Remember that as the loan amount increases your instalments to repay it will also be bigger. It is advisable to use a business loan EMI calculator to know the sum that you can repay and apply for the correct amount of funds that will fulfil your need.
- Check your eligibility—Borrowers are often asked to pledge some financial asset as security, to be eligible for most of the conventional loans. However, FinTechs offer unsecured loans and check the creditworthiness of borrowers on the basis of years in operation, revenue earnings, past loan history if any and compliance of the business with tax laws. You can check your eligibility criteria relating to specific loans by referring to the lender’s website or speaking to their customer service team.
- Compare loan costs on all parameters—Do not be instantly allured to loans that advertise low interest rates. Such an SME loan may also have a loan processing fee of 3% or more, and multiple hidden charges such as a legal fee, documentation fee, insurance premium and other statutory payments. On the other hand FinTech loans that have a slightly high interest rate come with just a processing fee of up to 2% and no hidden fees.
- Collate the required documents—To verify the information filled in a loan application you will need to have your KYC documents, copies of the latest tax returns, bank statements and few other papers as per the nature of the loan sought. The benefit of going for a FinTech loan here is that you only need to upload soft copies of such documents as the loan application is made digitally.
- Apply for the loan—Once you have understood your requirements, eligibility, cost of the loan and have collected the required papers, the last step is to apply for the funds. When you make a digital application, ensure that the lender has a secure website that will encrypt all your personal and business details.
At Capital Float every business loan application is reviewed within minutes of its submission, and if approved, the fund is disbursed in the next 2-3 business days. At the end of these 5 steps to find the best business loan type for your business requirement, you can be rest assured that you have the right amount that you wish to add to your working capital and the right loan type from the collection of credit products at Capital Float that is customised for your needs.