The loan is a favourable thing because it helped businesses in their growth. You should know how to manage the loan to grow your business.
There are various types of loans available including working capital loans, term loans, NBFCs, and equipment financing.
The debenture is a bond used by a company to raise money from the market.
NBFC’s are independent bodies that can take a little more risk in comparison to banks by giving unsecured loans.
The term loan is taken for capital expenditures such as machines, company expansion, factory setup, and plant set up.
A working capital loan is taken to pay the operational expenses such as salary, supplier’s payment, rent, and electricity bill.
How to raise loans through debt instruments in india
The loan is a favourable thing because it helped businesses in their growth. You should know how to manage the loan to grow your business.
You can raise a loan through many debt instruments that are discussed as follows.
1: Debentures
The debenture is a bond used by a company to raise money from the market.
When a company wants to raise a limited amount of money, it can approach the institution but when a company wants to raise a large amount, it can approach the public.
Usually, the public gets 5-6% of the interest in a bank F.D, the company offers 8-9% of the returns.
The public can check the credit rating of the company.
A credit rating shows the financial strength of the company to return the money borrowed from the market.
ROC doesn’t allow the private limited company to raise loans from any individual.
A debenture is an instrument used in such a situation.
So, when a private limited company wants to raise money from a large number of people, it doesn’t have to approach each individual, rather it can list the debentures of their company.
The individual can buy debentures and the company can raise money from the market.
The company can take such kind of loan at a fixed or floating rate.
Also, the company can decide to pay interest monthly or annually basis.
In the unsecured type of debentures, the company doesn’t have to keep any security because they are raising money from so many people.
A debenture is a written contract where a ‘debenture trust deed’ is made.
There is trust because people are giving their money as a loan to the company and they don’t know much about the company.
All rules, regulations, and specifications are written in the debenture trust deed.
Company book the interest paid on debentures in their Profits & Loss account and gets a tax deduction.
The maturity date of the debentures is fixed where the company has to return the amount to the public.
If the company is out of money at the time of maturity, it can offer one share for one debenture.
So, the conversion of debentures into shares saves the cash flow.
Therefore, a debenture is an important instrument through which large companies raise cash by listing their debentures on the stock exchange.
In India, if a private limited company raises the money it is called debenture, but a government institution such as RBI raises the money it is called a ‘bond.’
2: Bank/NBFC loan
NBFC refers to non-banking financial companies.
Banks come under the purview of RBI that makes many norms and conditions for these banks.
NBFC’s are independent bodies that can take a little more risk in comparison to banks by giving unsecured loans.
They have the flexibility to fund the businesses which are not available to banks because RBI keeps control over banks.
There are many banks of India that give loans such as State bank of India, HDFC, ICICI, Yes Bank, RBL bank, etc.
NBFC ‘s in India include IIFL, Fullerton India, Lendingkart, HDFC Ltd, Bajaj Finery, TATA capital, etc.
All these NBFCs run independent companies, unlike banks.
Following are the point of differences between NBFC’s and banks:
RBI keeps control of banks but not on NBFCs.
Banks have public deposits in the form of savings a/c, current a/c, but NBFCs don’t have such a/c. It gives a loan from an investor’s amount.
3: What is the eligibility of loans?
The following types of companies are eligible for taking a loan in India:
- Individual
- Proprietor
- Private limited
- LLP
- Public limited
- Trust
Types of businesses:
- Manufacturing
- Trading
- Services
If you are a self-employed professional whose turnover is of Rs.40 lakh, you can easily get loans.
SME with a turnover of Rs. 4-5 crores turnover can avail the loan easily.
Also, the business should be running for 3 years to be eligible for raising loans from the banks.
Your CIBIL score should be more than 750 for raising a loan from any bank.
You have to visit banks, check their requirements about documentation, and convince them about your ability to repay the bank loan.
Banks generally charge an 8-12 % rate of interest for the loan.
NBFCs generally charge a 12-24% rate of interest on the loan.
4: Types of loans
The following are the types of loans:
1. Term loan:
The term loan is like life insurance which is for a long period.
It can be raised for 3-10 years.
It is taken for capital expenditures such as machines, company expansion, factory setup, plant set up, etc.
It is provided on the basis of the following things:
- Credit history
- Project capability
You have to pay the interest of the term loan on monthly basis.
Also, the repayment is flexible and loan pressure is not so much.
In some cases, this loan can be availed for 20 years, where one gets time to set up the business in a proper way and he can repay the loan.
2. Working capital loan:
A working capital loan is taken to pay the operational expenses such as salary, supplier’s payment, rent, and electricity bill.
It is taken when cash flow is not available to pay these expenses because the debtor will pay the cash to the company after 2-3 months.
So, this type of loan is taken for a small period such as 3-12 months.
It is given by the bank based on:
- Company rapport
- Receivables
- Collateral
Overdraft limit for working capital loan:
You can keep shares & mutual funds as a security to avail loan.
For example:
You have Rs.5 lakh shares.
The bank will give you an over-limit of Rs.10 lakhs that you can use during the period of a shortfall.
So, interest will be charged on the duration for which money is withdrawn.
3. MSME/SME loan:
These loans are given to meet the business requirement and the loan size is generally Rs.20 lakh.
These loans are available to small businesses under various schemes.
The loan limit ranges up to 12 -60 months for those, who are starting the business or expanding their small business.
4. Equipment financing:
SREI is India’s no 1 equipment finance company that finances equipment ranging between Rs.50 lakh to Rs.100 crores.
For example:
1. Small Contractor
A small contractor needs equipment worth Rs.2 crore that he can’t afford, but he can pay monthly rent for the equipment.
With the help of the equipment, he can get many projects and earn revenue.
Now, he can finance his equipment.
2. Large Contractor
Suppose you are a large contractor and you need a backhoe loader, JCB, dumper, and drilling machines that are very expensive.
But, you know that you will get projects such as road, deep digging that will make a revenue for your business.
So, the best way is that you can finance equipment, pay EMI from your revenue and after paying the full amount, all equipment will be yours.
Generally, the tenure is between 4-5 years and the interest rate depends upon your CIBIL score and relationship with the bank.
5. Invoice financing:
For example:
You supplied cocoa to the Cadbury company and raised a bill of Rs.10 lakhs but the amount will be received after 3 months.
Now, if Cadbury approves/stamps this bill of Rs 10 lakhs, you can raise a loan of approximately Rs.6-7 lakhs against this bill.
You can refund the loan amount to the bank when you receive the cash from Cadbury.
Invoice financing is also known as “factoring” and the most famous institution is IFCI.
IFCI has a factoring division where you can show your invoices and take loans if these invoices are from good clients.
All these instruments will help you to raise debts for your business.
Conclusion :
Raise loan for your business with the help of a suitable debt instrument
Repay the loan on time to maintain a good credit score.