Capital is the primary factor that is required to start any business. Whatever may be the nature and size of the business, a person who has to begin a business from scratch needs money or hard cash to materialize his dreams. It can be a fresh Startup venture or an existing venture that needs money to expand or to run the day to day operations of the business.
A businessman usually has two sources from which he can raise finance, viz; from his own funds or from external sources. The need for finance can be of different nature.
A startup venture may require some funds initially to start a business. Some existing businesses may need urgent funds to execute some projects or orders that are in hand. Some others may require funds for expanding and scaling the business according to their business plans as envisaged.
Secured and Unsecured Business Loan :
If a prospective businessman is unable to arrange funds in his personal capacity, he would normally approach a Bank or a Non-Banking Finance Company(NBFC registered under RBI) and apply for the same. The Bank or an NBFC usually have different types of loan schemes in their stable to be sanctioned to their clients. Business Loans generally are of two types;.i.e. Secured loan or Unsecured business loan which may be again classified according to the nature and type of loans, that which are introduced by the Government such as Term Loan, Mudra loan, Startup India Loan etc.
The Bank or NBFC accepts applications for Business loan on fulfilment of certain conditions and submission of relevant documents. For eg; for a Startup Business, the bank would require some common initial KYC documents such as Aadhar Card, Pan details, Address proof, Income proof, CIBIL score etc. Other documents such as Project Report, Pitch Deck, Financial projections for the next 5 years, Income Tax return details are also required.
The Bank would ensure that the business idea of the prospective Startup has sufficient scope, has good potential in the market for sustaining in the future, whether the business concept of the venture is socially relevant and whether it has the capacity to earn regular profits etc.
For Secured loans, the bank or the NBFC would normally require some collateral security to be pledged against the sanctioned loan amount. Collateral security may be in the form of Land, Building, Equipment, or Machinery. The bank may ask for the valuation report of the pledged security or they may undertake a valuation exercise on their own. Approximately, 50% to 70% of the value of the collateral are sanctioned as a Secured Loan for fixed periods of tenure and rate of interest.
These loans are of long term in nature and are sanctioned for capital expenditure or for working capital purposes and may be in the form of Bridge Loan, Term Loan or Working Capital Demand Loan.
Similarly, a Bank or an NBFC may also lend Unsecured loans for businesses, which are loans lent without any collateral security. These loans are usually are of smaller amounts mostly below Rs.50 lakhs. Examples of these loans are Mudra loans and loans for SME sectors.
The bank would ask for only normal KYC documents for unsecured loans and do not insist on any income particulars. These loans are of short term in nature and is more suitable for small scale businesses like small shops, cottage industries and other businesses which are not capital intensive in nature.
Need for Private Loan or Private Finance :
As we can note from the above, business loans normally fall under Secured or Unsecured nature. But it may not be possible for some businesses to provide for collateral due to lack of any asset/security to be offered to the bank. These type of businesses may require large funds for their operation and therefore would be unable to apply for Unsecured loans.
Some of this type of businesses may be already in existence, but would be operating below their normal capacity due to lack of funds. They might have the right setup such as professional team of workers, prospective orders or customers in hand, technical knowhow, a registered entity like Private Limited Company or LLP etc.
These businesses would not have ready funds to start the operation. Or there may be companies that may have been running successfully in the past but may have stopped due to some factors beyond their control like for eg; during Covid 19, many MSME and small scale businesses were forced to close down due to the Lockdown imposed by the Government of India and the cascading effect of the same on all businesses.
Some firms close down because of adverse market conditions and low demand. Such businesses may want to revive their defunct companies with fresh infusion of large funds even without having any collateral or other relevant documents that may be required by Banks or the NBFCs.
Private Financiers :
What would such businesses do or where can they acquire the required funds? Where can they seek finance urgently to aid their business and improve their financial condition? Here comes the role of Private Financiers, who are the most preferred source of lenders for them. Private Financiers may be Wealthy Individuals, Private Nidhi companies, Private NBFCs(not regd under RBI), Unregistered Family Offices etc. These financiers fall under the unorganized finance lending sector.
As these financiers are not formally registered under the RBI, they generally have other core business but lend their surplus money to needy businesses. These financiers generally do not ask for all the mandatory documents that Banks require. They see the strength of the particular business sector, the market and demand for the products/services, the future potential/profitability of the business.
Some of the financiers may insist only on collateral security as a condition and don’t insist on other documents. They fund around 50% of the value of the property and in case of a default in repayment of their loan, they seize the property offered as collateral and settle their dues. They also charge a very high interest rate of viz; 2% to 3% p.m. payable monthly, quarterly or yearly. Some financiers also charge a service fee of around 5% to 6% which are deducted upfront from the disbursed loan amount.
Role of Finance Consultants in Private Finance :
Business ventures seek this kind of finance only if they are highly confident of their future earnings and have sufficient backup in the form of collateral or other assets. Also, businessmen who has had an excellent track record of the earnings in the past, have a unique business concept, afford the high interest rates, have low CIBIL score due to some unavoidable reasons apply for this type of finance.
These types of funding are mostly arranged by independent finance consultants who have a list of private financiers in their record. They know the intricacies and the conditions of private funding and can pitch and recommend their case to the financiers. Businesses normally approach such financiers through these consultants who also assist the borrowers in the negotiation of interest rates.
Thus, it can be observed that Private Loan or Private Finance also plays an important role as an alternative funding source for business houses in India. Though it has its own advantages for a prospective client like immediate funding, minimum documentation, low formalities, it also has its drawbacks such as high interest rates and service charges which makes a considerable dent in the borrower’s pocket.
Therefore, businesses are advised to carefully measure the pros and cons of acquiring Private Finance and contact a reliable finance consultant to help them in their quest of fund raising activities.