Increased demand makes it imperative for you to scale up your operations. And as you contemplate taking a business loan from a local bank,take a quick look at all the dynamics involved:
Most banks give loans to small and medium businesses for the following reasons: • Working capital requirements • Acquisition of land and building • Building construction/up-gradation or renovation of offices, showroom • Substitution of high-cost debt • Computerization expenditure
• Business Entity: Businesses organized as a sole proprietorship, partnership or Private Limited Company
• Profitability: The business should be well established and should have a proven record of profitability. A number of banks agree to loans only when the business can show that it has earned pre-tax profits in each of the immediately preceding 3 years
• Exiting Loan Records: a Track record of existing loans should show a positive picture, with all repayments being made on time. This works to the advantage of the person seeking the loan.
• Existing Relationship: Most banks prefer that the business has an existing relationship with them so that they can vouch for the businesses repaying capability
Documents required: An indicative list comprises —
• Latest sales tax/VAT/service tax return • Latest income tax return • Bank statement • Certificate of registration • Proof of ownership: Title Deed, Municipal Tax/Municipal Charge Bill / Receipt, Property Tax Paid Bill • Residence Proof: Telephone Bill/Electricity Bill Driving License/Valid Passport • Identity proof: Driving License, Passport, Pan card
• While this differs from bank to bank, on an average, there’s often a minimum cap of Rs.25,000 and a maximum of Rs 1 crore for such loans.
Tenure of Loan:
• This too differs from bank to bank – while most banks have an average tenure of 3 to 5 years, the same can be re-negotiated in case the business owner has been the bank’s client for long. • Repayment too can vary from being monthly or quarterly installments as per the normal cash generation cycle.
• Consists of tangible security, such as immovable property, bank deposits, NSC, RBI relief bonds etc to the extent of a minimum of 100% of the limits sanctioned.
• Personal guarantees of proprietor/partners/promoters are also invariably obtained. Good business practice is to make a comprehensive study of all banks in the city and assess which bank gives the best loans with minimum interest and repayment benefits.
Also, with an array of loans and schemes that are available and with banks going all out to woo clients, good businesses enjoy an edge, a commanding position – a business owner can use his negotiating skills to get a good deal from the bank for his loan.