The best loans for entrepreneurs

When Dr Suman Gupta, 47, a Delhi-based doctor, and his partners incorporated Eden Hospitals Pvt. Ltd in 1997 and set up a multi-specialty healthcare centre in south Delhi, it soon became a success story. In 2001, Gupta decided that they needed to expand the hospital and it required a capital infusion of more than what the business could generate internally. A Rs 15-lakh term loan from ICICI Bank, without any collateral, did the needful. All Gupta had to submit with his loan application were his three years of income tax returns, identity proofs, and post-dated cheques.

Akshay Sangal (R) and Satpal Gupta Purpose: Expanding imports of their ceramic products Amount: Rs 40 lakh Type: Cash Credit or CC

The personal loan-type product for professionals, unsecured and repayable through instalments, though, was not Gupta's first bank loan. He had taken a loan against collateral from Oriental Bank of Commerce (OBC) in 1997 and repaid it. "At the time of my second loan, I checked loans at ICICI Bank and a public sector bank. The interest rates were the same, but the former was more inclined to offer the loan without collateral. So, I went for it," says Gupta.

For Akshay Sangal and Satpal Gupta, both founder-directors of Delhi-based Prust Ceramics, an importer of ceramic products, the bank loan came in 2006 in the form of 'Cash Credit' or cc (see The Core Products) of Rs 40 lakh from OBC.

Sangal pays an interest rate of 14.75 per cent on this revolving cc account. The company, which has a warehouse-cum-showroom in Delhi and marketing offices in many cities, posted sales of Rs 4.7 crore last year.

"We wanted the loan for expansion. Our business was already well run and generating handsome cash flows. The best option for us was to get a CC. OBC offered us the loan on the basis of the soundness of our business," says Sangal.

Sangal and Gupta are two of the millions of entrepreneurs fuelling demand for credit. Almost all private and foreign banks today offer 'personal loans', with limits varying from Rs 10-25 lakh for small businesses.

Dr Suman Gupta (L) with his partners Purpose: To refurbish and expand 10-bed Eden Hospitals to 25 beds Amount: Rs 15 lakh Type: Unsecured personal loan

These loans are unsecured, come at a cost of 18-24 per cent, are sanctioned without hassle and repaid through instalments. "Most of our high-ticket personal loan portfolio is actually for business deployment. The advantages of personal loan are fast approval, disbursement without the need for guarantor or security, and the ability to bridge medium- and short-term funding needs," says Rajeev Yadav, Business Leader (Personal Loans), GE Money India.

A Source of Funds

Agrees Anil Kothuri, Head (Auto Loans and CitiBusiness), Citibank N.A.: "Personal loans have long been used by self-employed individuals to raise funds for investing in their businesses.

At Citibank, our ticket size and overall disbursements under personal loans are increasing." The popularity of personal loans also reflects the hunger for credit in India's SME sector, which is growing at a rate of about 12 per cent as compared to the GDP growth of about 9 per cent, according to Bhuvnesh Khanna, Head (SME), HSBC India. "Banks in India have been striving to reach out to millions of small enterprises that can neither provide the collateral nor have the past financials. Lenders are also trying to cut distribution costs.

So innovation is the way out," says Khanna. HSBC, for example, recently extended its overdraft and factoring services to small and medium businesses to help them scale up fast. Vijay Chandok, Senior General Manager (SME Group), ICICI Bank, says: "The small entrepreneur has been changing, in the last three years, from someone who wanted convenience to one who wants more money. Banks are realising that their collateral-based lending models will have to become flexible, based on cash flows and commitment of the entrepreneur to his/her business."

Aseem Dhru Executive Vice President and Head (Business Banking), HDFC Bank: "The unorganised small businesses prefer collateral-free, emi-based personal loans"

Bankers are also looking at a number of 'credit surrogates' to expand lending to the small entrepreneurs. Simply put, 'credit surrogates' usually don't align with laid down norms of credit but give a degree of confidence to the lender. For the borrower, it means the lenders are more sympathetic to their needs. Most banks nowadays have 'pre-approved loans' designed to cut time of sanction, as well as loan against all kinds of assets, including stocks and mutual funds.

Products are also tailor-made to suit the needs of a particular trade or profession. For example, SBI, ICICI and HDFC banks offer loans for transporters. Similarly, there are products for construction, pharmaceuticals, apparels, gems and jewellery, tourism, and many professional services. Aseem Dhru, Executive VP & Head (Business Banking), HDFC Bank, says his bank has been experiencing huge credit pull from shopkeepers, artiyas (traders-cum-commission agents in farm commodities), and those engaged in numerous other trades in the unorganised sector. Most of this demand is coming from Tier-II cities, towns and rural areas. "The unorganised small businesses prefer collateral-free, EMI-based personal loans, which are growing at 35 per cent. We have been lending as small a sum as Rs 50,000 to a vada pao vendor to Rs 15-20 lakh to larger businesses," he says.

Though the public sector banks do not offer 'personal loans' of the kind that private and foreign banks do, their business loans are also becoming increasingly competitive. Ravindra Yadav, CEO (Rural Development Trust), OBC, says his bank has been offering loans up to Rs 5 lakh without collateral and up to Rs 25 lakh where collateral can be waived based on business metrics. OBC also offers loan against property for business purposes at a very competitive rate of 13.25 per cent.

Cashing in

Entrepreneurs have a plethora of options to choose from. 

ICICI Bank's 'office equipment loans' are available for a minimum amount of Rs 30,000 with a tenure of 12-36 months on hypothecation basis

Fullerton India's vyapaar scheme is focussed only on self-employed individuals/small establishments with a turnover of less than Rs 2.5 crore per annum

GE Money India offers 'personal loans' and 'home equity' loans, primarily to small business borrowers with interest rates starting from 16 per cent and 12 per cent, respectively

HSBC India's factoring service enables you to raise immediate cash against your invoices. The bank pays up to 90 per cent of the value of eligible invoices within a day of submission of invoice and the delivery documents. No collateral and you pay interest only on the funds utilised

Citibank offers 'quick loans' up to Rs 25 lakh without collateral for short- term fund requirements; it also offers unsecured overdraft up to Rs 2.2 crore, on which interest is charged only on amount utilised

Oriental Bank of Commerce offers entrepreneurs loans up to Rs 5 lakh without collateral and Rs 5-25 lakh where collateral can be waived (based on business track record)

Behind the Loan

Essential conditions for a loan.

Asset-backed: If you have the required assets to offer as collateral, getting a loan sanctioned will not be a problem. This is the easiest way of taking a loan, which also comes with the lowest interest rate

Cash flow-backed: Disbursed on your revenue streams, but the lender will make a careful assessment of your business model. These loans will depend a great deal on your business plan and balance sheet. Purely cash flow-backed loans are costlier than asset-backed loans
 
 
The Core Products

Some types of loans on offer. 

Term: Commonly understood as a 'loan' -primarily for medium- or long-term (say three-to-10 years)-this can be used for investments in fixed assets such as land and machinery, or renovation and expansion. It becomes due on a given date and has a pre-specified repayment schedule in installments.

Bhuvnesh Khanna Head (SME), HSBC India: "Banks in India have been striving to reach out to millions of small enterprises that can't provide the collateral"

Overdraft/working capital loans/factoring: A bank offering you overdraft allows you to overdraw your bank account up to an agreed amount and charges you interest at the agreed rate. A working capital loan (or Cash Credit) is quite a similar product wherein the bank opens a CC account of the agreed amount for the borrower, converts it into a current account, and allows the borrower to use it, charging interest. In factoring, the bank buys your accounts receivables at a discounted price, assuming the responsibility of collecting them from the party that owes you money.

Pro Start-ups

Most bankers agree that organised lenders generally avoid start-ups, but the growth of unsecured loans is a reason for hope for the new entrepreneurs, particularly high-skill professionals and those who can part finance their businesses.

Some people in the banking industry believe that India's "sub-prime lending" market, which offers loans at very high interest rates to borrowers with risky credit profile like new entrepreneurs with no collateral or financials, is expanding fast.

Vijay Chandok Sr GM (SME Group), ICICI Bank: "The small entrepreneur has been changing, from someone who wanted convenience to one who wants more money"

"A number of banks have been lending at rates of 36-40 per cent to business-borrowers that present high degree of risk. For example, old private banks have been lending on sub-prime basis to entrepreneurs in small towns and rural areas. And public sector banks have been doing it for a long time.

Now, at least one foreign bank is known to have been offering these kinds of loans, which I would call a kind of 'venture capital'," says a senior banker who didn't want to be named. So if you want money for your business, this is your best time.