Bagging a business loan ::Business Line

Public sector banks seem to offer the best deals, though they may not be quick to disburse the loan.

Did you let the entrepreneur in you die, after some unsuccessful attempts to raise money from your family? Go dust off that project report, as this week we give you tips on raising a loan.

Banks should be your first choice when you want to raise seed capital for the business. One, they don’t ask for a share of business profit or a share in ownership and two, they don’t charge usurious interest rates.

Public sector banks today have a number of schemes in their bouquet, specifically for women entrepreneurs. It isn’t essential that you use only these schemes owing to your gender.

Instead, you should evaluate them on the basis of the cost of borrowings (interest as well as charges such as processing fee) and convenience.

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GOLD LOANS

Loans against jewellery are often easier and quicker to obtain than other kinds of loans. This is mainly because you offer collateral (your jewellery). You have two options here, going to a bank or specialised gold non-banking finance companies (NBFCs). While banks score over NBFCs on interest rates, they lose out on processing time. However, if you are not in an urgent situation, it pays to wait and take the loan from a bank. Here is the math.

Suppose you pledge 50 grams of gold. The current market price of gold is around Rs 2,800/gram. Both banks and non-banking finance companies today lend a sum of Rs 2,000-2,250 per gram of gold pledged. With 50 grams of gold you can raise around Rs 1,12,500 (at Rs 2,250/gram).

Assuming that you pledge the gold with a bank for a year, your interest on the loan will work out to Rs 14,063 (@13 per cent interest).

For the same loan, your interest on an NBFC loan could be as high as Rs 28,125 (@25 per cent).

The advantages with NBFC loans are that they are quicker to obtain and you could negotiate a lower rate if you agree to borrow less. But with such stiff interest rates, do evaluate if your business can turn in a profit that covers the borrowing costs.

WOMEN-ONLY SCHEMES

All public sector banks have schemes specifically tailored to women entrepreneurs in their kitty. These offer concessional interest rates and lower processing charges.

But don’t expect to bag these loans if you are a stock broker or a human resource consultant. They are often restricted to conventional businesses associated with women. For instance, Punjab National Bank funds women entrepreneurs who want to set up a crèche.

All basic infrastructure requirements such as appliances are funded. Oriental Bank of Commerce has a special scheme that helps entrepreneurs to start a beauty parlour, boutique or salon. State Bank of Mysore funds women-led catering businesses. Most of the women-only products offer loans not exceeding Rs 15-20 lakh. They offer a concession of 0.25 to 0.5 per cent on interest rates, bringing down costs to 13-14 per cent a year. This makes them more attractive than personal loans which would charge 15-20 per cent a year.

But, the catch with some of these schemes is that in addition to having a lien on the assets bought with the loan money, they also ask for an additional security or a guarantor.

In State Bank of Hyderabad’s Stree Shakti Package, for all loans above the value of Rs 10 lakh, the borrower has to provide collateral for at least 40-50 per cent of the loan value. Oriental Bank of Commerce asks for collateral to cover 100 per cent of loan value. State Bank of Mysore’s Annapurna scheme requires no collateral but insists on a guarantor.

Repayment of the loan is in equated monthly instalments (EMI) with tenure of 3-5 years. Your EMI will work out to around Rs 16,847 for a Rs 5 lakh loan, for 36 months, at an interest of 13 per cent a year.

COLLATERAL-FREE LOANS

If you intend to start a business without collateral, you can check out MSME (micro, small and medium enterprises) loan schemes with public sector banks.

Under these schemes most banks lend up to Rs 100 lakh and there is no collateral requirement. The loan is guaranteed by the Government’s Credit Guarantee Fund Trust for MSMEs.

Women self-help groups or any of you individually can apply for loan under the above.

However, note that if your CIBIL scores are poor, you may not be eligible for a loan. Interest rates are around 12.5 per cent to 13.5 per cent. Rates may however be higher depending on the bank’s assessment of risks for each individual borrower.