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.

If you own a valuable asset in the form of a self-occupied house or a commercial property you can unlock its value by going in for a loan against property. Earlier mainly an option of self-employed individuals, Loans Against Property (LAP) is gaining acceptance among the salaried class also as a means to tide over cash crunch. LAP gives you access to finance on the basis of the property that you hold. It is a secured multi-purpose loan with longer tenure and lesser rate of interest than a personal loan. Banks are now promoting LAP as an effective credit instrument to meet your needs like expansion of business, wedding expenses or education.

Features & benefits

The criterion for applying for LAP is that it should be a freehold and self-owned property, having a clear and marketable title. The loan is given as a certain percentage of the property’s market value (around 40 - 60 per cent). With real estate prices on the ascent, entrepreneurs are exploiting the benefits of taking such a loan to meet their need for low-cost funds for investment. Returns on business are higher than the cost of a loan against property. Loans against property are 30-40 % cheaper than personal loans. LAP will have a longer tenure than a personal loan, usually a maximum of 10 years. But a few banks allow tenure up to 15 years. Repayment is through EMIs.

A significant feature of LAP is that one can avail the loan even while a home loan exists against the property. However, the loan eligibility will depend entirely on your repayment capacity. The loan amount sanctioned may range from Rs.25,000 to Rs.1 cr. Normally the lender won’t bother about the end use of the loan. But some banks like SBI want the borrowers of amounts exceeding Rs.25 lakh to give an undertaking that the loan won’t be used for any purpose other than agreed upon. Banks also allow overdraft in place of loan. The customer is charged interest only for the amount that he withdraws from the account.

Eligibility & documents

Lenders want to make sure about the value of the property and your repaying capacity. The loan amount is usually 24 times the net monthly income of salaried persons and for others twice the net annual income as per latest IT return less taxes payable. LAP is also subject to the minimum market value of the property. Norms vary from bank to bank. But generally the following are the eligibility norms: An employee who has a monthly net salary of at least Rs.12,000. A self-employed person or an income tax assessee with a net annual income of Rs.1.5 lakh. The income of the spouse may be added if he/she is a co-borrower or a guarantor. Maximum age limit : 60 years for salaried and 65 for self-employed.

A borrower has to submit three additional documents apart from what is required for a normal housing loan. Copies of all the property documents have to be handed over before approval of the loan. Borrower has to give a declaration stating that the loan amount would not be used for any other purposes. A valuation report of the property from the professional valuer appointed by the bank is a must. Identity proof and proof of residence along with income proof has to be provided. Salaried individuals have to submit their latest salary slip, Form 16 (along with salary certificate from the employer), and bank statement for the last 3 months. Self-employed people have to furnish copies of their IT returns for the last 2 years, balance sheet, and profit & loss account, bank statements for the last 6 months.

Fees & Charges

Different institutions have different ways of charging fees when you submit the loan application. All lenders charge a processing fee, which may vary from.25 percent to 2 percent. Some banks collect the processing fee along with the application. Most banks charge a prepayment penalty if the borrower forecloses the loan before the expiry of tenure. It is charged as a percentage of outstanding amount, anywhere from 1 to 4 percent. If the borrower wants to change from fixed to floating rate of interest or vice versa he has to shell out a fee. It can be as high as 2 percent of the outstanding principal. There are also charges like penalty for late payment of EMI; statement charges etc.

Overdraft & EMI

The loans against property are generally repaid in equated monthly installments (EMIs). The repayment period could be from two years to 15 years depending on the lender. SBI allows a borrower to divert surplus funds towards prepayment of the loan without attracting any penalty. Banks also offer LAP as overdraft. Here the customer is charged interest only for the amount that he withdraws from the account. Whenever he deposits funds into the account, it goes towards reducing the outstanding balance in the account. Taking a LAP may be an easy process. But remember to make repayments regularly. If you fail you could end up losing your home.