A Guide on Business Loan

Why my Business Loan got rejected?

It is common for business loans to get rejected. Getting your application rejected doesn’t mean it’s the end of the road for you. The most important factor is to grasp why your application got rejected. Banks and alternative establishments generally offer reasons for why they rejected a loan. They can’t approve all loans for obvious reasons.

Reasons why Business Loan are getting rejected

1. Credit Score

One of the most common reasons for loan rejection is if the lender deems your credit score to be “too low.” The magic score number will differ depending on the lender and situation. Your personal credit score does factor into a small business loan, even if your company has been in business for a while. If you can’t manage your personal credit, the logic goes, how reliable will you be when it comes to paying back a business loan?

If a low credit score is the reason you are turned down, review your score and take steps to repair it. It’s a good idea to brush up on what goes in to your personal and business credit score, too, so you understand how you are being evaluated. If you have a successful business, but had to damage your personal credit to build it, you’re not alone. Take heart: there are more options out there for you than ever before.

2. Poor Business Performance

Many businesses have income issues from time to time; however, if your business has more expenses than income, it denotes a red flag. A low revenue, cash flow gaps and different issues that a loan can’t fix are all red flags for lenders. If lenders see that there’s no cash for everyday operations, it shows that you won’t be able to make repayments on a loan.

3. New Enterprise

When assessing your Business Loan application, most lenders consider your repayment history and take a look at your P&L Statements and ITRs from the past years. If you are a fairly new business, you may not have the requisite experience or records to prove your sound financial standing, which may prove to be a hindrance for approval.

In this case, you can contact other channels such as small business loans through various government schemes, or crowd funding.

4.  Annual Turnover doesn’t meet minimum Requirements

More often than not, a lender will want a small business to meet a certain minimum turnover each year to qualify for a loan. This not only ensures that there’s enough cash flow to help the business pay back the loan, but it also proves that the business is viable.

5. Heavy Debt Usage 

If a business is under excessive debt, potential creditors may look away. This is because the main concern of any lender is the business’s repayment capability. If a lender observes that the business is piled under heavy debt, it could indicate trouble. 

6. Business Vintage 

Before granting a business loan, creditors generally consider the business’s past performance track record and market presence. As a new business, it isn’t possible to increase your business history overnight. In such cases, it’s better to opt for alternative funding to improve your eligibility. For first-time businesses, it makes sense to consider alternative funding options such as crowd-funding, small business loans from the government, etc. It is important to establish good credibility before making a business loan application.

7. Short Credit History

While not as vital as your credit score, the length of your personal and business credit history is additionally an element in your bank loan application. There are chances your application may get rejected if your personal credit history is lesser than 3 years.

8. Industry is Deemed ‘Risky’

Some lenders (particularly traditional lenders) will deem your industry as “too risky” to loan to. As an example, this might include specific agricultural or construction based businesses, however this will also depend on each individual lender. If this is the case, you’re certainly not to blame, but keep in mind that you may be able to seek finance through a government grant instead.

9. Insufficient Collateral

If you’re trying to apply for a secured business loan but lack the appropriate collateral to do so, then your lender will reject your application pretty quickly. If this is the case, then it may be worth considering an unsecured business loan instead, as this type of finance doesn’t require collateral.

10. Credibility of the Lender

A lender who approaches you with sugary words may not turn out to be so, once you are hooked. Before you commit to a lender, after calculating your home loan eligibility make sure that there is no likelihood of sudden decrease in approval amount from the lender. Credible lenders which include reputed banks maintain transparency at every stage.

How to deal with Business Loan Rejection

Once the business knows about the potential reasons why its loan application might be rejected, here is some of how it can be better prepared to deal with it:

1) Improve Credit Score: The credit score of a business reflects directly on its debt-servicing capacity. Historical debt records allow lenders to calculate the business’s risk profile. Thus, it makes sense to maintain a disciplined payment cycle for all accounts receivables and credit card bills to boost the chances of loan approval. 

2) Clear outstanding Debts: Lenders verify the loans which a business would have already availed. Any outstanding loans have to be paid off to improve the debt-to-income ratio and improve the borrowing capacity.

3) Adopt a smart Tax Strategy: Tax exemption allows a business to reduce the overall tax burden and increase total income. Therefore, businesses can consider hiring a professional for ensuring proper tax planning to reflect business profitability in terms of tax return income.

4) Make Sure You Have All Your Documents Correct: Even if your financials are impeccable, if you don’t provide the proper documentation to a lender, you’ll get denied for your loan. If you’ve been rejected for a loan, one of the first things you should do is review the documentation you filed with your application for a small business loan. If everything is in order, dig deeper into the financial picture that your documentation portrays.

5) Don’t Give Up: Just because you’ve been rejected for a small business loan doesn’t mean that your business isn’t viable or that you won’t go on to do great things. If you do get rejected for a business loan, take it as a learning experience. Carefully analyze the elements that led to your rejection and piece together a winning plan to overcome those obstacles on your next go-around.

Types of BL

Invoice Discounting

What is Invoice Discounting?

Invoice discounting also called Bill Discounting is a way in which a company can borrow short term funds from banks or financial institutions based on their outstanding invoices. Invoice Discounting is a manner in which businesses can raise short-term funds to meet short-term liquidity needs. Invoice Discounting is an alternative to a business loan or an overdraft facility. Under Invoice Discounting, the company provides the unpaid bills to the banks or financial institutions and in return, receives funds up to 90% of the outstanding bill value. It helps keep cash inflow from customers constant and they can pay within their normal credit period.

Documents required for Invoice Discounting

Here is a list of documents required for Invoice Discounting:

1. Pan Card
2. Aadhar Card
3. Address Proof of Business and Entrepreneur
4. Business Registration Proof
5. GST registration certificate
6. Filed GST Returns
7. Ledger of Debtors
8. Nine months bank statement
9. Audited financial statements of the business

Types of Invoice Discounting

When it comes to invoice discounting, there are a few types that you can choose to maintain a steady flow of working capital.

·         Whole turnover invoice discounting

With this type of funding against an invoice, every invoice that a business generates across the turnover is discounted to raise funds, irrespective of the needs of the said business.

·         Confidential invoice discounting

Like its name suggests, with this type of financing, the entire process is carried out in confidentiality. It means that suppliers or customers of a company are unaware of the business raising capital against invoices before payment is received.

·         Selective invoice discounting

Spot factoring or selective invoice discounting are some of the examples where single receivable invoices are sold to third parties to raise capital.

These are the three principal types of invoice discounting which help companies acquire working capital for their businesses without hassle.

Factors on which Invoice Discounting depends

• Your business financial requirement
• Your monthly turnover for your business
• Your business visibility
• Active clients in your business
• Invoices outstanding amount

Features of Loan against Invoice India

• Bill Discounting is an invoice business loan.
• It helps small businesses to obtain funds almost immediately based on invoices which are already present as collateral.
• The invoice can be sold at up to 90% of the invoice value to the discounting agency and cash can be obtained.

How does Invoice Discounting work?

Invoice discounting is one of the most popular methods for arranging working capital for business. Under invoice discounting facility, the invoice raised for the customer is sold to the bank or financial institution at a discounted price. This implies that the money that the business would receive at the end of the credit period is collected instantly. Generally, all lenders offer this facility at a predetermined percentage of the invoice value, which varies anywhere between 75% – 90% and the rate at which the invoice discounting facility is available varies between 1.5% – 3.00%. Here is how Invoice Discounting works:

• Entrepreneur sells his commodities to the customer and raises a bill or invoice depicting the particulars of the sale, i.e. date of sale, number of products sold, payment due date, etc. As the transaction is a credit transaction, the time taken by the customer to make payment can be delayed till the due date, while the entrepreneur or seller will expect immediate payments.
• Therefore, to retrieve the lockdown funds, the entrepreneur can reach out to banks or financial institutions for invoice discounting facility
• The bank or financial institution upon their due diligence shall pay to the entrepreneur as per the predetermined percentage, kindly note, this amount shall be less than the invoice amount. The difference between the actual invoice amount and amount paid by the bank is called the ‘Discounting Fees’ and is taken by the banks or financial institutions.
• Later, when the customers pay back to the entrepreneur, they can repay the amount to the bank.

Methods of Invoice Discounting

Invoice Discounting can be availed in two ways, namely:

• Invoice Discounting with Recourse: Under this method, the banks or financial institutions carry out document verification of the entrepreneur or business and send it to the seller’s bank. In case of default, the entrepreneur or business is liable for the bad-debts
• Invoice Discounting without Recourse: Under this method, the banks or financial institutions do not carry any document verification. Additionally, in the case of bad-debts the liability to collect lies with the banker or lender.

Advantages of Invoice Discounting

• Increase in cash flow

Business owners can release a lump-sum amount otherwise tied up in unpaid sales invoices, and increase the cash flow. This method of availing capital works best for businesses which have a smaller number of clients generating high invoice values. It is mainly because for such businesses, a single unpaid invoice can keep a substantial capital tied up.

• Instant availability of financing

With this method, you can avail financing within 72 hours of applying. Thus, the capital is available instantly, much faster than other methods of traditional financing options.

• Confidential transactions

You may not inform your customers when you opt for this method of financing, allowing you to carry out the transaction confidentially. It puts a business’s concerns of losing customer confidence to rest.

• Increased funding with business growth

Unlike other business loans and overdraft facilities where funding is available only up to the stated amount, you can avail a higher amount with invoice discounting if you generate high-value invoices. Thus, with the growth in your business, you can avail increased funding against such invoices.

• Protection against bad debts

When you avail invoice discounting for your business, few financers offer protection against bad debt for your business. This protection comes to force if a customer turns insolvent and fails to pay against the invoice.

While these are some of the advantages, you must also be aware of a few of the drawbacks of opting for this facility.

Disadvantages of Invoice Discounting

• Eligibility

It might be difficult for smaller companies to obtain credits through invoice discounting. However, businesses may be able to do away with this disadvantage if they can establish a steady track record, and instil confidence among financiers.

• Volatile

Invoice financing only offers partial or full funding for current accounts receivables and thus may not be adequate if a business is seeking a particular amount of business loan.

• Associated costs

Sometimes associated charges for utilising invoice discounting can be quite high. You can, however, address this shortcoming by looking for financiers offering the best deals with the proposition.

Working Capital Loan

Working Capital Loan is a type of funding or credit required by several startups, enterprises or companies to manage their day-to-day business operations and to manage business cash flow. Working capital loans are short-term loans to fulfill instant business requirements and cannot be used to buy long-term assets or for investment purposes.

Documents Required for Working Capital Loan

Below-given is a list of required documents for the unsecured small business loan application:

• PAN Card and a copy of valid identity proof is mandatory for an applicant who is an individual, firm or company
• Accepted address proofs are Ration card, voter ID card, driving license, or Passport
• Income documents include the latest Income Tax Return with computation of income, profit and loss account and balance sheet of the last 2 years. These documents must carry requisite certification from a Chartered Accountant. Alternatively, any other valid proof of income will also suffice. Please contact us to know more.
• Bank statements of the last 6 months
• Accepted proof of business continuation include Sales Tax Certificate, ITR, Establishment or Trade license
• A few other proofs include certified true copy of Memorandum and Articles of Association certified by the Director of the company and the Board resolution, a certified copy of the Partnership Deed or Sole Proprietor Declaration, etc

Key Benefits

• Funded facilities, i.e. the bank provides funding and assistance to actually purchase business assets or to meet business expenses.
• Non-Funded facilities, i.e. the bank can issue letters of credit or can give a guarantee on behalf of the customer to the suppliers, Government Departments for the procurement of goods and services on credit.
• Available in both Indian as well as Foreign currency.

Eligibility Criteria for Working Capital Loan

• Age Criteria: Min. 18 years & Max. 65 years
• Business Vintage, Annual Turnover and work experience to be defined by lender
• Good CIBIL score and repayment history
• No previous loan default with any financial institution

Features of Working Capital Loan

Listed below are the key benefits and features of taking a working capital loan in India:

• Working capital loans interest rates range between 17% and 27%*. The applicable rate depends on several factors such as your net income, collateral, location, business stability, existing monthly obligations, and more
• We offer collateral-free business loans upto INR 30 lakhs*
• Flexible repayment tenure ranging between 12 to 36 months for working capital loan India
• The processing fee is up to 6.5%* of the loan amount

Types of Working Capital Loans

1. Bank Overdraft Facility or Credit Line
2. Short-Term Loans
3. Equity Funding via Personal Resources or Investors
4. Accounts Receivable Loans
5. Factoring or Advances
6. Trade Creditor

Pros of Working Capital Loans

1. On-hand cash to deal with cash flow problems
2. Always in control of the company
3. May not need to place a collateral
4. Can borrow and repay promptly
5. No restrictions on how you spend the money

Cons of Working Capital Loans

1. Have to repay the capital and interest in full
2. May need to put up collateral
3. High rates of interest
4. Defaulting on the loan can affect personal credit score

Main components of a Working Capital Loan

The following are the main components of a working capital loan:

• Accounts receivables
• Inventory
• Account payable

Revenue-Based Financing

Revenue-based financing or royalty-based financing is a potential method of raising capital from a firm’s investors to meet business-oriented requirements. In exchange for the investment amount, individuals are entitled to receive a portion of the firm’s projected earnings, based on previous sales figures.

Investors continue to receive such pay-outs until they obtain a predetermined amount. Generally, the said predetermined amount is a multiple of their invested sum and tends to range between at least 3 to 5 times the principal investments.

Documents Required

•  GST Registration Certificate.
• PAN Card & Partnership deed (Applicable if Partnership company)

• All CC/OD/Current Account last 12 months’ bank statement (1^st May 20 to till date). All Bank statements where clients’ money is deposited.(in PDF format).
• Company Profile (Applicable if Pvt Ltd)
• PAN Card, MOA & AOA of Company (Applicable if Pvt Ltd).
• Latest shareholding pattern and List of directors (Applicable if Pvt Ltd).
• Office address proof (Utility Bills for Telephone, Electricity, GST Registration Certificate OR Bank Statement).
• Supporting revenue pipeline documents.

Benefits of Revenue Based Financing

1. Effective: It helps to meet immediate cash flow requirements. One can access funds through this option and facilitate their capital growth.
2. Less Risky: Start-ups are not required to pledge collateral to avail revenue-based financing. Also, firm owners continue to retain their ownership and control over the enterprise and its managerial as well as financial decisions, which means there is no equity dilution.
3. Flexible: Typically, when the revenue is less, the repayment amount is also less.
4. Transparent: Financiers have a clear idea about repayments and the terms of clearing the same. 
5. Longer Repayment Term: The repayment term is usually relaxed and can be opted for long term. It allows businesses to pay off their debt without straining monthly revenue. 

How does Revenue-Based Financing work?

There are firms that specialise in revenue-based financing. To start with, these companies look at parameters like revenues, cash flows, operating margins, scalability and growth potential among other things as part of their due diligence. Once convinced with the potential borrower’s prospects, they lend the required capital at a mutually decided rate of interest or fee.

Interestingly, this is quite similar to how an angel investor or even a VC would function, but what makes revenue-based financing different is the manner in which the funds are repaid by the borrower. The borrower commits to sharing a part of the business revenue with the lender. In other words, both the principal and the fee or interest that the lender charges, is returned from the revenues that the company earns during the normal course of the business.

Pros of Revenue-Based Financing

1. Retain Control

Revenue-based financing is similar to equity financing in that funding is secured through investors or firms such as Venture Capitalists (VC). They differ, though, in that VC financing requires a share of the company or a seat on the board. Revenue Based funding does not require any control of the investment company. It leaves decisions and ownership entirely to the founder.

2. No Personal Collateral

Revenue-based financing is similar to debt financing, such as a traditional bank loan, because repayments are made monthly based on a percentage of future revenue. The main difference is that RBF requires no personal guarantee as collateral against the loan, such as in a traditional business loan. Meaning, you do not have to risk any of your personal assets.

3. Payments Reflect Revenue

RBF is the most flexible option in investor financing because, as stated above, the repayment schedule is based on a percentage of monthly revenue. Therefore, if business is light, the payment is light. There will never be a month where the debt payment is more than the monthly income.

4. Quick Capital

Revenue Based Funding is approved on a much more flexible standard than traditional bank loans. Approval is based on the company’s monthly recurring revenue (MRR), and payment is set at the original loan amount plus repayment cap, traditionally somewhere between 1.3-3x.

RBF has lenient requirements, such as no specific personal credit score or business experience. Because of this, it is an excellent option for small startups such as subscription-based services and software as a service companies.

5. Mutual Incentive

Unlike with VC funding, RBF investors have a mutual incentive for companies to produce revenue early in the investment. VC investors invest large sums of cash upfront but do not see a return until the back end. For RBF investors, the incentive lies in the fact that the higher the monthly revenue, the higher their monthly percentage.

Cons of Revenue-Based Financing

1. Revenue Required

Because this form of financing is revenue-based, pre-revenue startups are generally not a fit. A revenue-based investor uses metrics such as MRR/ARR and growth projections to determine eligibility for a loan. 

2. Smaller Check Sizes than VCs

Venture Capital is known for shovelling out enormous amounts of cash for companies, even if they are pre-revenue. Investors in RBF deals will not provide capital that is worth more than 3 to 4 months of a company’s MRR. However, RBF investors may choose to provide follow-on rounds as a company grow, providing entrepreneurs access to more capital over time.

3. Required Monthly Payments

RBF requires monthly payments unlike equity financing. Startups may find themselves tight on cash, so it is crucial to take on a healthy amount of revenue-based financing that aligns with the company’s financial status and plans.  

Why Revenue-Based Financing?

Revenue-based financing is essentially a growth capital, availed to meet cash requirements related to

• Sales and marketing initiatives.
• Expansion of operational unit or scale of operation.
• Hiring talent and providing them with proper training.

Banking Surrogate

Banking Surrogate means ascertaining the eligibility of the customers only on the basis of his banking statements. This product is specially designed for the customers who earn variable income/ profits per month i.e. for the self-employed customers. The fixed income earners like those of salaried class are not considered under this product to qualify for higher eligibility.

Documents Required for Banking Surrogate

• KYC of the business entity and the business owner/s
•  Proof of Ownership for residence / office. Residence-cum-office is not accepted
• Business registration proof (AOA / MOA / Business registration certificate / GST registration certificate / Registered partnership deed / Gumasta shop establishment certificate)
• Business bank statements for the last 12 months

Eligibility criteria to apply for a Banking Surrogate

Here are the basic requirements for your business to be eligible for a Banking Surrogate Business Loan

•  Promoter’s age should be between 23-65 years
•  Business should be at least 2 years old
•  Must have one owned premises in operating city. Proof of ownership not applicable if business vintage >=3 years
•  Annual turnover should be between 50 lakhs to 40 crores
•  Have Bank statements for the last 12 months
•  Trusts, NGOs and charitable organizations are not eligible

Why Banking Surrogate Business Loan

While the possibilities are endless, here are some common purposes for which a Banking Surrogate Business Loan can be procured for your business:

• Meeting working capital requirements
•  Procuring raw material
•  Fulfilling bulk orders
•  Purchasing inventory
•  Paying suppliers in advance
•  Paying for overhead costs like rent, office expenses etc.

Features and Benefits of Loan

Most of the NBFCs and banks in the race of capturing market shares gave loans to customers based on surrogates which resulted in over leveraging. This is where customer takes undue advantage. Under this the customer approaches not only to one bank and takes money on the basis of surrogates thus defaulting in many cases.

But the scenario is changed completely. Surrogates would be helpful to a customer only once and if multiple applications of a customer will be seen then it may result into rejection of their accounts.

1. Loan provided on basis of other Loan Track

If the borrower has taken other big loans viz., Equipment loan, Mortgage, Commercial vehicle loan etc., which are large in size and repaid the loan with a clean track record without any default, then the new lender can extend the same or a little lesser percentage of Home loan to the borrower.

2. Funding depends on Bank Balance

For an industry where the turnover is very high but the profit margin is always low(certain trading business), the lenders do approve of the calculation basis the gross profit and not the net.Bank statements for the last 3-6 months are compulsory for ascertaining the credit worthiness of any customer. Therefore majority of the banks have started asking for it.

3. Gross Profit method

For an industry where the turnover is very high but the profit margin is always low(certain trading business), the lenders do approve of the calculation basis the gross profit and not the net.

4. Turnover based on Industry Margin

If the borrower is in a manufacturing or trading business then a standard profit margin has been internally set by the borrower. For example, a manufacturing unit having 2 crores of turnover is expected to make a 10% profit and thus the income can be considered as 20 Lacs and basis this the loan application can be granted, even if it is not shown. Similarly, for a trading business, it could have been set at 5% as there’s no machinery etc. like a manufacturing unit as an asset, and been flagged at a little higher risk grade. At the same time, a service industry may not be considered for this type of surrogate funding at all.

Minimum to maximum tenure range for a Banking Surrogate Business

You can avail a Banking Surrogate Business Loan amounting 1 Lakh – 10 Lakhs for a minimum of 12 months to a maximum of 24 months (with a 6-month interval).

Basic parameters of the Banking Surrogate

1. Application: The banking surrogate can be considered in the products of home loan, mortgage loan/loan against property, NRP loan i.e. non-residential premises loan, home loan balance transfer of home loan, mortgage loan balance transfer, NRP balance transfer, home loan top-up, mortgage loan top-up & NRP top-up. (Top-up loans are subject to the income eligibility and to the market value of the property).

• Loan Amount Criteria: The customer can apply for a minimum loan amount of Rs.10lakhs and a maximum loan amount of Rs.3crs. However, the ceiling limit for self- employed professionals such as doctors (MBBS/BDS/MD/MS), chartered accountants, company secretary, and architects, on the basis of their savings accounts only is Rs.50kakhs

• Loan To Value (LTV): LTV refers to the percentage of the property’s market value that a lender can finance through loans.
  For home loan – LTV is 70%
  For mortgage loan against residence – LTV is 60%
  For NRP – LTV is 65% if self-occupied & 55% if not self-occupied.

• Loan Tenure: Maximum loan tenure allowed under the banking surrogate is for 15 years. However, for the tenure of more than 10 years of in-home loan and NRP, the LTV percentage is lowered by 5%.

• NRP under-construction status: If the customer buys an NRP under-construction property, for him to qualify for a loan under the banking surrogate, the completion status of the under-construction property must be 75% for CAT A and B builders & 85% for CAT C builders.

• Account’s credit transactions: The banking statements of the customer must reflect a minimum of 3 business credits per month in the current account and a minimum of 3 transactions per month in the savings account.

• The ADB calculation and its applicable ratio: ADB stands for average daily balance. It is the internal calculation method of the bank for determining the loan eligibility of the customer on the basis of his banking transactions.

• Credit Summation: In banking, surrogate credit summation is yet the second calculative method in determining the loan eligibility of the customer on the basis of his banking transactions. To calculate credit summation banks consider every single credit entry in the banking account of the customer for consecutive 12 months and dividing the figure by 2 i.e. considering only 50% of the derived number. Total Credit Summation for 12 months * 50%

Microfinancing

Microfinance is a type of banking service provided to those who have difficulty in accessing formal financial services. It is targeted at the low-income and unemployed fraction of the population . The institutions supporting microfinance offer services such as lending, setting up bank accounts and providing micro-insurance products. In developing countries such as India, financial services through formal channels do not meet the demands of the rural poor, so microfinance can help small-scale businesses flourish by providing greater financial stability.

Documents Required for a Microfinance Loan

Although the documentation required for getting a microfinance loan varies between lenders, the following are the documents that are usually needed:

1. Updated application form
2. PAN card, copy of Passport, ration card
3. Proof of office address
4. Passport-size photos of the applicants and co-applicants
5. Certified copies of AOA/MOA/Partnership deed
6. Track record of repayment
7. Audited financials of the previous 2 years
8. ITR of partners/directors for the previous 2 years
9. Bank account statements for the past 6 months
10. Proforma invoice to the equipment that is to be financed

Objectives of Microfinance

1. To promote the socio-economic development among unbanked or under-banked families
2. To reinforce the Self-Help Groups (SHGs) and use them for economic development of the country
3. To support and promote startups and women entrepreneurship across the nation

Features of Microfinance

Some of the significant features of microfinance are as follows:

• The borrowers are generally from low income backgrounds
• Loans availed under microfinance are usually of small amount, i.e., micro loans
• The loan tenure is short
• Microfinance loans do not require any collateral
• These loans are usually repaid at higher frequencies
• The purpose of most microfinance loans is income generation

Key Benefits

The part that microfinance plays in economic development is noteworthy. Some of the key benefits of MFIs include the following:

• It enables people expand their present opportunities – The income accumulation of poor households has improved due to the presence of microfinance institutions that offer funds for their businesses.
• It provides easy access to credit – Microfinance opportunities provide people credit when it is needed the most. Banks do not usually offer small loans to customers; MFIs providing microloans bridge this gap.
• It makes future investments possible– Microfinance makes more money available to the poor sections of the economy. So, apart from financing the basic needs of these families, MFIs also provide them with credit for constructing better houses, improving their healthcare facilities, and exploring better business opportunities.
• It helps in the generation of employment opportunities – Microfinance institutions help create jobs in the impoverished communities.
• It brings about significant economic gains – When people participate in microfinance activities, they are more likely to receive better levels of consumption and improved nutrition. This eventually leads to the growth of the community in terms of economic value.

Types of Microfinance

Microfinance includes the following products:

1. Microloans – Microfinance loans are significant as these are provided to borrowers with no collateral. The end result of microloans should be to have its recipients outgrow smaller loans and be ready for traditional bank loans.
2. Microsavings – Microsavings accounts allow entrepreneurs operate savings accounts with no minimum balance. These accounts help users inculcate financial discipline and develop an interest in saving for the future.
3. Microinsurance – Microinsurance is a type of coverage provided to borrowers of microloans. These insurance plans have lower premiums than traditional insurance policies.

Purpose of Microloans

Microloans can be used for various business related activities, such as meeting working capital requirements, maintaining cash flow, starting a new business, managing day-to-day expenses, paying salaries to staff, debt consolidation, etc. People facing trouble in availing business loans generally consider microloans or micro finance.

GST Surrogate Business Loan

A GST Surrogate Business Loan is a product offering to MSME business owners to procure funding based on their GST record. If you are an MSME entrepreneur with at least 2 years of GST record, this loan would be the recommended choice for your business.

Documents Required for GST Surrogate Business Loan

• KYC of the shop owner
•  Proof of Ownership for residence / office
•  GST Registration Certificate
•  GSTR 3B for the last 24 months
•  Business bank statements for the last 6 months
•  ITR & Computation of Income for the last 1 year
•  Loan obligation sheet

Uses of a GST Surrogate Business Loan

While the possibilities are endless, here are some common purposes for which a GST Surrogate Business Loan can be procured for your business:

• Meeting working capital requirements
• Procuring raw material
• Fulfilling bulk orders
• Maintaining a healthy cash flow
• Purchasing inventory
• Paying suppliers in advance
• Paying for overhead costs like salaries, rent, office expenses etc.

Eligibility Criteria

1. Promoter’s age should be between 25-60 years
2.  Business should be at least 3 years old
3.  Self-Owned Residence or Office
4.  Have a minimum annual turnover of Rs. 2 crore
5.  Have Bank statements for the last 6 months
6.  Should not fall under blacklisted list of SBA finance
7.  Trusts, NGOs and charitable organizations are not eligible

Features and Benefits of Loan

Most of the NBFCs and banks in the race of capturing market shares gave loans to customers based on surrogates which resulted in over leveraging. This is where customer takes undue advantage. Under this the customer approaches not only to one bank and takes money on the basis of surrogates thus defaulting in many cases.

But the scenario is changed completely. Surrogates would be helpful to a customer only once and if multiple applications of a customer will be seen then it may result into rejection of their accounts.

1. Loan provided on basis of other Loan Track

If the borrower has taken other big loans viz., Equipment loan, Mortgage, Commercial vehicle loan etc., which are large in size and repaid the loan with a clean track record without any default, then the new lender can extend the same or a little lesser percentage of Home loan to the borrower.

2. Funding depends on Bank Balance

For an industry where the turnover is very high but the profit margin is always low (certain trading business), the lenders do approve of the calculation basis the gross profit and not the net. Bank statements for the last 3-6 months are compulsory for ascertaining the credit worthiness of any customer. Therefore majority of the banks have started asking for it.

3. Gross Profit method

For an industry where the turnover is very high but the profit margin is always low (certain trading business), the lenders do approve of the calculation basis the gross profit and not the net.

4. Turnover based on Industry Margin

If the borrower is in a manufacturing or trading business then a standard profit margin has been internally set by the borrower. For example, a manufacturing unit having 2 crores of turnover is expected to make a 10% profit and thus the income can be considered as 20 Lacs and basis this the loan application can be granted, even if it is not shown. Similarly, for a trading business, it could have been set at 5% as there’s no machinery etc. like a manufacturing unit as an asset, and been flagged at a little higher risk grade. At the same time, a service industry may not be considered for this type of surrogate funding at all.