The increasing number of businesses in India has had an evident impact on the GDP. SMEs have mainly contributed to this rise in GDP. Not only has this sector been helping the GDP, but it also contributes to generating employment for many. While running a small business, getting the best possible out of the available resources becomes imperative. However, sometimes this might not be enough to run the business smoothly. These SMEs require funding at various stages like business initiation, managing operations, capital expenditure, and recovering from losses.
In such cases, borrowing a certain amount can go a long way. Although there might be many ways to go about it, the best remains to be SME Loans.
Banks and financial institutions have also significantly increased their focus on the small business sector credit, acknowledging the role of this sector in the economy. However, lack of awareness regarding this causes a hindrance for entrepreneurs to avail credit.
Financial institutions offer a few loan schemes that have tangible security backing with a business loan. These loans are cost-effective as the interest rates can be adjusted given the reduced credit risk due to collateral security in the case of fraud. These are called Collateral Based Business Loans.
There is a wide range of collateral that you can use to avail loans. These can be classified into the following major groups:
A significant role that collateral plays in reducing the credit risk is in four different ways:
Here are a few things that you must know to avail cost-efficient collateral based business loans
Lenders make sure that there is a clear and marketable title to the security offered as collateral. Suppose the borrower is offering residential property, the financial institution checks for all the property documents for authenticity, then only they take custody of the original title document of the property.
Since the loan is given based on the requirement, creditworthiness, and cash flow, the upper limit is dependent on the market value of the collateral. The loan-to-cost ratio is the proportion of collateral against which the bank or financial institution will be willing to give a loan. This ratio spans between 70-85%. Hence, the borrowers should choose suitable assets in line with the funding requirements.
The criteria for business loan sanction also include the business cash flows. Hence, business owners should make sure the projections are realistic. Good collateral, without a profitable business, might not get the loan sanctioned.
The SME business loans cash will be availed for long-term. But, the business owners must look for repayment options for enabling clauses of partial or full prepayment of loans. In case of additional cash flows, these can be used to prepay the loan to reduce the debt and interest rates.
Applying for an SME Business Loan is a very easy and convenient process and can be done online or offline. Backed business loans have many collateral benefits like improved asset liquidity, growth, asset diversification, etc. Still, certain things are to be taken care of while taking a business loan. One needs to wisely choose the loan requirements, the collateral, and the tenure of the loan.
Shriram City Union Finance is India's leading Non-Banking Financial Company (NBFC) that was incorporated in 1986. Shriram City Union Finance provides expert and specialized services in retail, Micro, Small, and Medium Enterprise (MSME) lending. Shriram City Collateral Based Business Loan offers faster and secure processing with competitive interest rates and flexible tenure. It provides you with easy accessibility and easy repayment of the borrowed amount.