Getting a loan from a bank is tough for an entrepreneur. Here are some tips to help you get the loan you need
Drawing the first lakh from a loan account may be challenging for every entrepreneur. But isn’t a challenge what makes an entrepreneur chase his dream?
Shiv Shankar
is an entrepreneur engaged in the export of commodities. Having been in the business for over three decades, he has grown his enterprise to a size with the ability of generating regular returns on a monthly basis. While cash generation is good from the business, the worrying factor for Shiv Shankar is the outflow. Despite the business ability to generate monthly income of Rs 3.5-4 lakh, Shiv is left with a meagre surplus of Rs 20,000 at the end of month. The culprits? The huge component of EMIs that go towards his property loan, overdraft and hand loans. Shiv actually has three properties and all of them were financed through loans and the cumulative EMI component is as high as Rs 2 lakh. Having touched the age of 52 at the beginning of this year, our man is getting worried a bit. He wants to cut down on the loan component and reduce the monthly outgo towards EMI too. The question is why did he get into such huge loan portfolio and invest in innumerable properties?
If you ask the traditional entrepreneur he would tell you that for the self-employed fixed assets are a necessity as they come in handy while raising loans. This time-tested strategy, practiced by many for decades, surprisingly still holds good if you are an entrepreneur banking on borrowing for your business.
Typically, the Indian banking system has followed the practice of medium risk while lending and as a result, loans are given out only on the basis of collaterals. While personal loans and overdraft facility strictly don’t adhere to this borrowing principle, the macro policies of banking in India continue to thrive on the concept of collateral. As a result, if you approach a banker for a loan, the first question you are asked is the list of assets that you can demonstrate for the banker’s comfort. It can be frustrating but how does a young entrepreneur who wants to create enterprises purely with his ideas, survive in the collateral world? Here are some tips:
Sound business plan
The success of a business thrives on the market potential and its ability to cash in on the market prospects. A banker too believes that an entrepreneur needs to put in place a sound business plan if he hopes for bank funding. After all, a banker has the job of deployment of funds to generate income and in the era of rising non-performing assets, he doesn’t want to be on the wrong side. So, the word of advice for budding entrepreneurs is, translate your dreams into numbers so that the banker on the other side can measure up to your dreams. Get your projections right on the market, company’s turnover over the first few years of operations, and more importantly, the break-even point. Needless to say, earlier (break-even point) the better.
It is not a bad idea to hire professional help for drawing up the business as conceptualising the idea and putting it for the outside world is a different story. Luckily, there are many professional agencies that
offer this help for a fee.
Impressive past
If the future has to be perfect for a lender, history is even more important. If individuals are expected to keep a clean track record for a loan, so is the case with the self-employed. Hence, as a prospective borrower, make sure to project a healthy balance sheet of your personal wealth. A healthy cash balance, zero track records of negative banking habits such as loan defaults would surely help. In the current banking environment bad borrowers and their bad habits are in the public domain and hence will pull down your creditworthiness to a great extent.
I would say, your first choice of lender should be your existing banker as he has the knowledge of your money management and financial health. After all, banking is all about relationships and a past good relationship will go a long way in increasing borrowing.
Many of us can’t rewrite or plan our history but if you are an individual nurturing the ambitions of entrepreneurship, you can plan your finances more effectively. Keep in mind the fact that bankers love assets and the more illiquid the better! The properties need to be either in your name or in your spouse as they can act as collaterals. Now you know why entrepreneurs like Shiv Shankar bet on property for their investments.
While property creation need not be at the cost of severe cash crunch, it is not a bad idea to allocate a portion of assets in property. In terms of value, commercial would get better recognition than residential but banks don’t attach much value to land. While land has the potential to offer higher returns, it does not have value as collateral.
And finally, as an entrepreneur, should you rely on banks and borrowed funds or stick to own capital. A true entrepreneur creates wealth out of nothing and hence, make your enterprise works for you rather than the other way around. A banker is bound to test your patience with your ability to generate business and cash-flow but you have chosen the path of entrepreneurship because you love challenges! The initial years may be challenging but then every entrepreneur has had to go through the grind. Once you have business story in place, bankers will be chasing you with their money bags.
Srikala Bhashyam
Srikala Bhashyam is an investment consultant and runs her own consulting firm in Bangalore. She has been a regular columnist for the print and internet media on personal finance.
To write to the author, please send an email to dare@cybermedia.co.in with the subject line 'Srikala Bhashyam'.
Disclaimer: The views expressed here are that of the author and do not represent the magazine's.
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