LoanRaja Blog- Personal Finance Guide

Every entrepreneur has aspirations to make it big in business. But paucity of finance is a hurdle quite often. Now business loans are offered by almost all banks to help traders, businessmen and professionals to start or expand their commercial activities. Loans to self-employed professionals such as chartered accountants, architects and doctors also form part of this. These loans are available at competitive interest rates and low EMIs to widen the customer base. Every small and medium sized enterprise needs access to working capital. Simple unsecured business loans are available to small and medium enterprises for all the working capital needs.

No uniformity

Business loans are both secured and unsecured. Banks give business loan in the form of business installment loan, overdraft, loans against property, security and fixed deposits. The minimum tenure is 12 months and maximum 48-60 months. There are wide variations in the schemes provided by different banks and the amount of loan granted. It can be anywhere from Rs.25,000 to Rs.5 cr. SBI’s Traders easy loan scheme provides loans to entrepreneurs, professionals and self-employed. Standard Chartered Bank has a business installment loan. A business installment loan (BIL) is a loan, which allows you to borrow cash to accommodate your business needs whether for short-term working capital funding or to support your expansion plans. Repayment is by EMI through post-dated cheques.

Loan under SBI’s scheme is sanctioned against equitable mortgage of property. The loan can be repaid in monthly or quarterly, or half yearly installments in a period up to 5 years. Minimum and maximum amount of loan is Rs 25,000/- and Rs 5 crore. Business requirement is assessed on the basis of projected business turnover. Interest at floating rate is charged at monthly intervals on daily reducing balance. Standard Chartered Bank offers two borrowing options: Borrowing against the fixed deposit and taking an unsecured loan. When your enterprise requires urgent finance, an overdraft against your investments may be just the right option. An advantage is that you pay interest only on the amount utilized.

Every lender wants to make sure that loan will be paid back. Collateral property is the common way. But risk factor is always there. Banks will analyse your previous experience in the business and your success chances of your new business plan. If you want to take a loan for expanding your business the lenders will analyze your business history, tax returns, revenues and liquid assets. If you are planning to start new business the process may be complicated. How you present your business plan plays key role in getting a loan.

Eligibility

Business credit is generally offered to the following types of concerns: Sole proprietorships, partnerships and private limited companies. Income requirements: Net Income of the concern should be more than Rs. 1,50,000 per annum for business credit up to Rs. 15 lakh and over Rs.3 lakh for business credit above Rs. 15 lakh and up to Rs. 35 lakh. A maximum of two incomes of the partners / directors holding a minimum of 25% stake each can be clubbed to the income of the concern.

Documents

There are differences in the documents required for sole proprietorship firm, partnership firms and private limited companies.

• Proof of identity of the sole proprietorship firm.
• Proof of individual identity to be submitted for the proprietor.
• Proof of residence address to be submitted for the proprietor.
• Certified profit and loss and balance sheet for last two years.
• Copies of IT returns for the last two years.
• Bank statements for last 6 months for business credit up to Rs. 15 lakh and last 12 months for business credit above Rs. 15 lakh.

In the case of partnership firms proof of identity of the partnership firm as well as proof of individual identity for the all partners have to be submitted along with a copy of the partnership deed. For a limited company proof of identity of the limited company, copies of memorandum and articles of association, certificate of incorporation, board resolution, copy of annual return establishing the shareholding pattern have to be submitted.

Charges

A processing fee of minimum one percent of the loan amount is generally charged. There are variations. Banks deduct it from the loan amount, which will then be credited to the current account of the borrower. Some banks charge prepayment charge of up to 5 percent while others don’t charge anything. In the case of overdraft there is an annual review and lender will charge an annual fee every year.

The decision to go in for a home loan has to be taken with utmost care and planning. Since it has long-term implications on the family budget thorough planning is a must. A false step can land the borrower in unexpected financial strait. Plethora of schemes and incentives being advertised by lenders regularly can confound any prospective borrower. The market is crowded by hordes of sales agents who tend to paint exaggerated figures on eligibility and interest rates.

Never blindly go by the advertisements that promise loans at very cheap rates or the sales agents’ words. He may give a false impression about your eligibility and try to persuade you to borrow more than your requirement. The first step is to make a realistic assessment on the resources you can spare every month for repayment of the loan. Then try to find out your eligibility. Not all banks calculate eligibility norms alike. Some go by the net salary while others go by gross salary. Some HFCs take into account the income of close relatives of the borrower while others include only the spouse’s income. Gullible borrowers may blindly opt for loans on the basis of false assumptions and end up taking more than they can afford.

Explore your options

Many borrowers just go to a single HFC and accept the deal they are offered there without making enquiries elsewhere. In a competitive market there is always room for a better bargain. All rates including processing charges are negotiable. Get a thorough understanding of interest rates and service charges prevailing in different banks. Try to get in writing from the lender the prevailing interest rates and other fees. Better to opt for the bank that offers the lowest EMI. Hiding details about your liabilities and assets may have disastrous consequences, as the lender will invariably scrutinize them closely. If you can prove to the lender that you have a good track record in repaying loans it will be advantageous. If you can get a pre-approval letter from the bank it will help you to negotiate better with other lenders.

Customarily, a loan agreement is weighted in favour of the lender. Some financial institutions may have hidden clauses and conditions, which may not be conveyed to the prospective borrower initially. But all these unfavourable clauses will surface in the final agreement, which may be different from what was promised. Some borrowers tend to sign on the dotted line. Never sign a loan agreement without thoroughly understanding the implications of all clauses like foreclosure charges, reset etc. Lenders generally reserve the right to revise the rate of interest at their discretion. Even if you have opted for a fixed rate loan it is not really fixed. It is vital to know what action the lender will take in the event of default. Customer should know whether any penal interest would be levied. Lenders have also a right to recall the loan at any time.

Interest rates

Loan rates are not uniform. Customers usually are in a fix on choosing between fixed rates or floating rates. They often don’t have a clear idea about the exact difference between fixed rates and floating rates. The two basic types of home loans based on the interest rate are fixed rates and floating rates. Market conditions determine the floating rate. Floating rate loans are subject to periodic review, normally every quarter. Some HFCs review rates annually. Check whether the fixed rate loan you have chosen has a reset clause that allows the bank to review interest rates. In the case of floating rate it has to be ascertained whether the interest is being calculated on daily, monthly or annual rest. Consequently you end up paying more as interest over the years in case of annual rests as compared to monthly rests, even if the interest rate is the same.

Our financial needs change throughout our life. As the life style changes needs too undergo transformation. In accordance with the changing financial needs life insurance needs also change. The life insurance requirements of an unmarried 25-year-old will be entirely different from that of a married man with children. A 60-year-old’s insurance needs will be totally different. A plethora of life insurance policies are available now to suit the needs of different age groups. Lifecycle based portfolio strategy takes into consideration the dynamics of different life stages of an individual. Its investment approach changes with each life stage.

Such a policy provides you with an option of lifecycle-based portfolio strategy that continuously re-distributes your money across various asset classes. This will be done based on your age, and helps you achieve the right asset allocation to meet your desired financial goals. In the beginning, your investments will be distributed normally between two funds. As you move from one age band to other, the fund will redistribute your investments. This will take into account the ability to take risk at different ages. Earlier years will see more allocation for equity and less for debt. In later years the trend will reverse.

Before marriage

In the case of a young man of 25 who has just started earning, the thought of investment may be the last thing to figure in his mind. He may be single and getting support from the family. He is ambitious and focused on his career. Mostly he likes to spend. Perhaps he is thinking of going for higher studies. At that stage of life what kind of life insurance suits him best? His life insurance needs are almost negligible. The main objective for insurance should be to promote a habit of saving. For this the best option is to buy an equity linked insurance scheme which doubles as an investment tool. He can also try a shorter-term endowment assurance policy.

After marriage

After marriage one’s lifestyle gets reoriented and financial needs undergo a sea change. Young couples dream big. A better car, owning their own home, a foreign holiday…. the list is endless. It is also the time to think about your added responsibilities. You now have a partner; you may be buying a house and perhaps planning for a family. It is time for you to start focusing on your family and yourself. At this stage what can be the insurance solution? You can opt for a home protection plan to take care of your home loan if the inevitable happens. A personal injury insurance plan to provide for the medical needs will be an added advantage.

The birth of a child ushers in far more changes in a couple’s life. Along with the joy the newborn brings on new responsibilities. This is the time a family will seriously plan for the future. What kind of protection plans will serve your needs at this stage of your life? Parents would like to provide the best for their children. They deserve a secure future and a whole lot more. You also need to adequately protect your assets, so that your family is provided for even if something unfortunate should happen to you. A home loan protection plan will ensure that your family is not burdened by the home loan even if you are not around.

It is also important that you plan in advance to meet your child’s future financial needs. Insurance firms offer several child-related investment avenues for parents wherein the money is invested in endowment plans and in unit linked plans. Planning financial resources for your child at various life stages like education, marriage etc. are fulfilled by Money Back Child Insurance Plans. Parents can also invest in unit-linked Children Insurance Plans where there are better returns. This has more flexibility in terms of switching one’s money from equity to debt and also can withdraw money several times in a year.

After retirement

At the other end is the 60-year-old retired man. He has no regular jobs or steady income. His children are financially independent. He has no financial liabilities. He needs regular income to lead a decent life. Moreover, he will need sufficient cash balance for any emergency medical expenditure for him and spouse. At this age he has to manage with his savings and investments. He is not in a position to take risks. His basic concern will be the protection for his investment and also protection for his spouse. Such a senior citizen can select single premium immediate annuities or long-term care products or a retirement plan, which protects capital and gives steady income.