DARE - Because Entrepreneurs Do

Preparing for a business loan

1. DARE: What are the typical stages at which enterprises would want to raise business loans?
   Banker: While doing business planning, inceiving, expansion, forward integration in greenfield projects and others.
   
   
2. DARE: At what stage will an enterprises likely to be considered by banks for a loan?
   Banker: After the company has been formed, all formalities have been done with, all registrations and agreements are in place. Greenfield projects are funded by only PSU banks.
   
   
3. DARE: How do banks evaluate an enterprise for sanctioning a loan and what determines the loan amount: is it the balance sheet, the order book, collateral, prospect of future business?
   Banker: In case of a start-up, Balance sheet is not there. So, normally business model, demand- supply & competitors’ status, tie-ups & orders, team background, sustainability, break even horizon, product profile, quality controls, financial position & projections (Tangible net worth, Gearing ratio, other ratios), technical-managerial expertise, execution risk (Operational hurdles - like NOCs and approvals for Land, building, power, pollution etc.), Sensitivity Analysis are looked upon to determine the loan amount.
   Often, collateral asked is much more than 100% of the loan, which may even include property, personal and corporate guarantee. 
   
   
4. DARE: What are the types of loans an entrepreneur can raise? How do they differ?
   Banker: Please see the banking products and services infograph/ story. A loan is given for maximum 5 years in general circumstances. For a new plant of an existing company, the moratorium period is 3 months. For an altogether new company, moratorium period is one year or when cash inflows occur, whichever is earlier.
   
   
5. DARE: Can an entrepreneur pledge all his future bills to a bank?
   Banker: For pledging future bills, there should be certainty of receivables in near future, e.g., based on contract. e.g., a educational institute knows that it will receive fees for next one year. So, after deducting TDS, tax, salaries etc, bills are pledged and loan is given. Alternatively, all these expenses are made from the loan itself.
   All banks have such products, but many of them don't reveal it deliberately.
   
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   Due-diligence

6. DARE: What risks will the bank take to sanction a loan?
   Banker: Risk of Bad debts affecting balance sheet of bank, increased NPA, recovery record going bad, and bad debts need to be written off in account books.
   
   
7. DARE: What risks does an entrepreneur while availing a loan?
   Banker: Risk of Bad performance, non-repayment of interest and principle which affects the credit-worthiness, survival risk and risk of repossession of assets under Securitization Act (as banks can sell property in 3-4 months now, compared to years, earlier).
   
   
8. DARE: What common mistakes an entrepreneur needs to avoid while applying for a loan?
   Banker: Avoid the common mistakes of a business plan:
   
   • The business should not be at infancy stage, but at execution stage.
   • Own funds should be available with the proprietor at least to the tune of 25%.
   • Company should  have been formed and all registrations should  be in place.
   • Raw material , order book should all be in place.
   • The person should have some standing in industry.
   • Don’t agree to terms you cannot comply with.
     
     
9. DARE: How should an entrepreneur prepare his project report for a business loan?
   Banker: For preparing project reports, help should  be taken from lending institutions, CAs, technical and financial consultants. They should be asked for formats of project reports.
   It should automatically include past track record, sales projections, future performance, Working Capital ratios, PAT, PBT etc., so that if your loan is rejected, you atleast know the exact reasons and can argue over them.  It should also have the vision/ mission.
   
   
10. DARE: How to stay ahead of payments?
    Banker: Financial discipline is necessary. Do not overspend. Do proper cash flow planning. Don't take more loan than required and don't take loan before repaying old loan. Instruct the ban to maintain a Trust & Retention Account for you. (To know what it is, see your bank now!)
    
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    Credit Guarantee and Repayment

11. DARE: Is there a credit guarantor? How can an entrepreneur get a credit guarantee? At what price?
    Banker: Yes. CGTMSE. It has 110 Member Lending Institutes (MLIs), including most of the banks, who coordinate with it to get guarantee for the loan requests. There is ECGC for exports.
    See the infograph on credit guarantee rates for prices in July issue.
    
    
12. DARE: What are the best practices for an entrepreneur to meet his repayments schedule without fail?
    Banker: Prompt repayment. They can restructure loans.
    
    
13. DARE: How does an entrepreneur be prepared for contingencies like delayed payments due to his delayed collections?
    Banker: Don't hide from or avoid bankers. Keep reserve funds. Face bankers, suppliers, customers directly.
    
    
14. DARE: How does an entrepreneur increase his credit-worthiness?
    Banker:
    
    • Have prompt, and timely servicing of interest and repayment of principal.
    • Meet or rather exceed the projections made by you.
    • Do not under achieve the targets.
    • Give timely information to banks. Keep them updated.
    • Get external credit rating from agencies like ICRA, CRISIL, CARE, Fitch etc.
    • Give / Submit all statements, and docs to bank on time.
    • Route substantial business through the CC account of the loan giving bank.
    
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    Default scenario

15. DARE: In case of a default, what options are available an entrepreneur?
    Banker:
    
    • Apply for restructuring of loan, so that interest rate is reduced.
    • Moratorium period can be increased by the banks.
    • Apply for loan amount increment in case of delay and delinquency
    • Ask bank to decrease the EMI amount
    • Ask for FITL - Funded Interest Term Loan: The interest is bundled into separate loan which runs like a normal loan
    • Last option is OTS (One Time Settlement). It affects credit-worthiness, so is not advisable.
      Factually, these are all options before default occurs (within 90 days). After that it becomes NPA and nothing can be done then.
      
      
16. DARE: Can an entrepreneur re-schedule payments? For how long and by what amount can he bring down the premium paid every month?
    Banker: Payments can be rescheduled and banks do cooperate on this since they have to minimize their NPAs in any case. Basically, the options on default are decided on case-to case basis.
    However, RBI norms don't allow rescheduling as its included in NPAs.
    
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    Bank performance and government support

17. DARE: How much did the banks disburse to the SME sector last year?
    See the infograph.
    
    
18. DARE: How do banks ensure against NPAs? What checks and balances does it follow post sanctioning?
    Banker: They regularly call for stock statement, liquidation of securities, quarterly review report, balance sheet every year, internal and external ratings. Other banks’ statements and certificates from CAs on diversion and confirmation of funds are called for, and normal KYC norms are followed. The bank’s top officials even inspect the unit for functioning. They take the right measure if a company looks like going sick.
    
    
19. DARE: How do banks collect information about an enterprise prior to sanctioning? How does it monitor the health of the enterprise after sanctioning the loan?
    Banker: CIBIL (Credit Information Bureau [India] Ltd.) website has all the credit history of anyone who has ever taken a personal or business loan in India, from organised market. Moreover, there is independent inquiry from suppliers, customers, debtors, creditors and industry and personal references.
    
    
20. DARE: Is there a special drive for women entrepreneurs? Why should women go for it and not the regular route?
    Banker: Only some banks like OBC have schemes to SHGs, and MFIs offering low interest rates and low limits but only for smaller amounts. For higher amounts, they follow the normal procedure. Other banks treat all the loan requests as normal loan requests and process it normally.
    
    
21. DARE: What support do banks get from the government in disbursing more loans to SME sector?
    Banker: The credit guarantee is given by CGTMSE and ECGC, and for the 40% portion of banks’ funds that is supposed for priority lending gets some reliefs, like less CRR, and CAR.
    
    
22. DARE: What are the chances of an entrepreneur landing a loan in a rural area as compared to urban areas?
    Banker: Banks are opening new branches and even exclusive SME branches in rural areas. So, a chance of landing a loan there is gradually approaching upwards. 
    
    
23. DARE: What focus do banks have for rural areas?
    Banker: Banks are now opening more branches in rural areas - offering mobile ATMs, KCC (Kisan Credit Card), special schemes, and even SME branches.
    
    
24. DARE: Which route is better for availing the loan? Direct from banks or through a consultant?
    Banker: Although dealing through banking consultants helps you in personal interaction with the bank, and surely gets you some favorable terms, along with low interest rates in some cases, often by manipulating your balance sheet. However, in some cases, the consultant may actually increase the total interest charge on your loan.

* Based on interaction with multiple bankers and banking consultants

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