An SME loan is extended by fintech lenders, which are unsecured in nature and do not require the collateral cover of valuable assets. These loans generally extend from 6 months to 36 months and serve as the best business loans for SMEs. There is considerable freedom as to its allocation. Thus, it can be utilized for short term working capital purpose as well as towards long term capex purposes. Working Capital Loan is availed by a small business to fund their daily operational expenditure or routine business activities. Such loans provide cash infusion in the short-term and help generate revenues from business operations. These loans help meet expenditure like labor wages, inventory purchase, payment to suppliers and other operating expenses. Fintech lenders have enabled provision of the quick unsecured business loan with minimum loan approval time of 3-5 days. This has been facilitated by making use of cutting-edge technologies.
The following are the types of Working Capital Loans commonly raised by SMEs:
1) Trade Creditor Loan
This loan is generally extended by a current or prospective supplier. The vendor will conduct a background check of the credit history of the small business, before extending this SME loan.
2) Overdraft Facility
The extension of this facility largely depends on the business rapport with the lender, which influences the interest rate and the amount range of credit facility. A big advantage of an OD is that one needs to pay interest only upon the overdrawn amount and not on the entire eligible amount. On the flip side, the rates are generally set above the prime rate of the financial institution.
3) Account Receivable Loan
The quantum of this facility is dependent on confirmed sales order value of a business. It is ideal for a business that requires financial assistance towards meeting a sales contract. However, the prerequisites are having a good business track record and a healthy credit score.
4) Factoring or Advances facility
This operates in a similar way to the accounts receivable loans. The loan value is dependent upon future credit card payments. This loan can be used by business units that accept credit cards as a payment mode.
5) Invoice financing
Invoice discounting and financing is gaining popularity as a means of finance. Through this small business can procure working capital. There is generally a time lapse between the raising of the invoice and the ultimate realization. One can approach a financial institution to provide a loan against the invoice from reputed customers. Generally, 80% of the invoice amount is given as a loan and the remaining 15% becomes due when the invoice is fully paid by the customer. The lender will deduct nominal charges like the processing fee and interest.
6) Short-term loan
This is charged at a fixed interest rate for a maximum tenure of 12 months, with zero collateral cover.
Broadly a working capital loan is taken to meet the gap in liquidity to meet operational expenses.
The long-term loans extended by fintech lenders broadly comprise:
- Term loan
These are long term debt, where a corpus of the loan amount is disbursed towards capital expenditure. The tenure is fixed, with either a fixed or variable interest rate. Such loans appear in the balance sheet as long term debt under liabilities.
- Equipment financing
These types of loans are extended to the manufacturing sector. Equipment are instrumental to conduct business operations and production activity. To purchase equipment, most financial institutions offer specialized loan products. The tenure is fixed.
The above are broadly the main categories under which fintech lenders extend unsecured business loans. An SME must select the loan depending on the interest rate, tenure, and loan amount based on business needs.