- Term Loan
- Working Capital
- Collateral Free Loan
- CMA Report Preparation
The Term loan is a type of loan, which has to be paid in regular installments over time. Term loans are typically sanctioned for an acquiring or constructing or installing capital assets. Term loans in India are provided for a tenure of anywhere between 3 to 10 years based on the project, projected financial and other factors. The interest rate for the term loan will be based on the credit worthiness of the borrower and is usually a fixed spread over the banks base lending rate.
Types of Term Loan:
- Long Term
- Intermediate Term Loan
- Short Term Loan
Purpose of Term Loan:
- Capital Expenditure
- New Industrial Undertaking
- Expansion of Existing One
- Acquisition of Movable Assets
Documents Required For Term Loan:
- Audited Financial Statement of last 3 years along with Income Tax Return Acknowledgement.
- Provisional Balance Sheet for Current Year.
- Projection of Sale, Purchase, Stock & Raw material Consumption for the next year.
- Quotation of Machinery that you will Purchase.
- Installed Capacity , Licensed Capacity -Existing & Proposed, Envisaged Capacity Utilization.
- Details of Raw Material Requirement, Calculation, How desired? Source of Supply And Supply Position. The cost of raw material supported by current quotation.
- Maintenance arrangement & costs thereof.
- Detailed Project report & Project implement Schedule.
- Additionally, you have to mention the cost already incurred.
- Sources of such Expenditure.
- The request Letter.
Procedure For Term Loan:
- Submission of Loan Application
- Initial Processing of Loan Application
- Appraisal of the Proposed Project
- Issue of Letter of Sanction
- Acceptance of Terms & Conditions
- Execution of Loan Agreement
- Creation of Security
- Disbursement of loan
Advantages of Term Loans:
- The loan is cheap for the borrower.
- The interest that the borrower pays on the term loan is tax deductible and hence can avail tax benefit on the interest paid.
- The term loans are negotiable and hence the terms and conditions of the loan are not rigid.
- The term loans represent debt financing and the interest of the equity shareholder is not weakened.
- The lender will have a collateral security and hence the loan is not a huge risk to the financial institution.
- Since the borrower will be making regular payments towards the principal loan amount and interest, the lender will have a regular and steady income.
- Since the loan can be converted to equity, the lender can get the right to control the affairs of the business or firm.
Working Capital Loan can be defined as a loan availed by the firms for covering their daily operational expenses. These loans are the excellent way for the businesses to become more focused on their growth and generate capital. The working capital loans in India have become popular among the business owners for tackling with their financial needs. These loans are not used for buying long-term assets and generally used for covering wages, accounts payable and other similar operations.
This loan is applicable for the small & medium enterprises for augmenting their working capital needs and meeting the daily operational expenditure. The majority of the working capital loans is unsecured, however the loans with high risks need some guarantee. The usual duration of a working capital in our country is from 6 to 12 months.
Types of Working Capital Loans:
- Bank Overdraft Facility :
An overdraft allows business to borrow money through their current account. One advantage of this is that the borrower only pays interest for the amount that has been overdrawn.
- Bank Guarantees:
A bank guarantee is when the lending institution guarantees that the liabilities of the debtor will be met, if the debtor fails to settle a debt.
- Letter of Credit:
A letter of credit from a bank guarantees that the seller will receive his specified amount on a specified date if the delivery conditions are met as decided.
- Packing Credit (PC):
Packing Credit is offered to exporters to help them finance the purchase and import of raw materials, and the processing and packing of the goods meant for export.
- Post Shipment Finance:
Post Shipment Credit is offered to exporters to help them finance export sales receivables, after the date of shipment of goods till the date of realization of export proceeds.
- Bill Discounting :
While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note) before it is due and credits the value of the bill after a discount charge to the customer’s account.
- Buyer’s Credit :
A loan facility extended to an importer by a bank or financial institution to finance the purchase of capital goods or services and other big-ticket items. Buyer’s credit is a very useful mode of financing in international trade, since foreign buyers seldom pay cash for large purchases, while few exporters have the capacity to extend substantial amounts of long-term credit to their buyers. A buyer’s credit facility involves a bank that can extend credit to the importer, as well as an export finance agency based in the exporter’s country that guarantees the loan.
- Factoring or Advances:
The Factoring working capital loan works in a similar way as the accounts receivable loans, the only dissimilarity is that the value of the loan is based on the future credit card receipts. This type of loan is perfect for the businesses who accept the credit card payments.
- Short-term loan:
A short-term loan comes with a fixed interest rate for a maximum term of 12 months. The business’s good credit history and relationship with the lender can allow them to get a short-term loan without securing any collateral.
- Equity funding from investors or personal resources:
This type of loan is perfect for a new business that does not have a good credit history. Equity funding is generally obtained from personal resources.
Benefits of Working Capital Loan:
- Cash credit or overdraft facility to meet day to day business requirements.
- Export credit facility to offer pre and post shipment capital to exporters.
- Wide range of bank guarantees to meet obligations of performance and finances.
- Buyer’s credit and letters of credit as non-fund based facilities for clients.
- Easy processing and disbursal.
- Available from a wide range of lenders and at competitive rates.
- Ensure continuation of day-to-day operations without worrying for short term financial needs.
- Large amounts for eligible clients.
Collateral Free Loan
A special type of collateral free loan scheme is available in India under the Credit Guarantee Fund Trust Scheme for Micro & Small Enterprises (CGTMSE). Under this scheme, the micro and small enterprises (MSEs) are eligible for collateral free loans up to Rs.1. crore in value. Under the MUDRA loan scheme loan of upto Rs.10 lakhs is provided for setting up and operating of micro and small enterprises in the manufacturing, processing, trading and service sector.
Documents Required for Collateral Free Loan:
- Company Registration Certificate:
The certificate of incorporation is a legal document relating to the formation of a company or corporation. It is a license to form a corporation issued by the state government. Its precise meaning depends upon the legal system in which it is used.
- MSME registration:
The registration of the business under the MSMED Act.
- Individuals IT returns for three years:
Every individual filer who earns a certain amount of income must file this type of tax return – the statement of earnings from various sources of income, tax liability thereon, details of tax paid and any refunds that have to be given by the government. If company is in business for over a year then the company IT returns too.
- Business proposal:
The written documents stating the sell from the seller to the prospective buyer.
- Provisional balance sheet:
The financial document widely used by companies to prepare for financial audits or report financial information for any reason.
- Project Report:
A document which gives an account of the project proposal to ascertain the prospects of the proposed plan/activity. The project report contains detailed information about –
Land & building required
Manufacturing capacity per annum
Machinery & equipment along with their prices & specifications
Requirements of raw materials
Power & water required
Cost of the project and production
Financial analyses & economic viability of the project
Benefits of Collateral Free Loans:
Collateral free loans are highly beneficial for people who don’t have collateral to show against a loan. Major benefits include:
- No collateral or third party guarantee needed.
- Attractive and subsidised rate of interest.
- Flexible repayment tenures up to 5 years.
- Letter of credit/bill discounting up to 180 days.
- No track record requirement.
- Product development funding.
- Moratorium period on repayment.
- Quick and hassle free processing of applications, largely due to a special cell taking charge of these requests.
CMA Report Preparation
CMA Report stands Credit Monitoring Arrangement Report. CMA data is required for Project Loans, Term Loans and Working Capital Limits. It is the report to be presented to bank to show your past financial history, current financial position and future financial planning. CMA Data is a systematic analysis of working capital management of the borrower and the purpose of this statement is to ensure the use of funds effectively.
while preparing CMA Data:
- The current ratio should be at least greator than 1.33.
- The sales should be generally 4 or 5 times of the amount of loan.
- There should be sufficient stock to act as collaterally to the loan amount.
- In case, there is another loan, the bank requires the status of the loan and defaults made, if any.
- The loan payback capacity of the firm identified by the cash and bank balance, debtors collection period etc.
Various ratios are to be computed related to working capital and assets. The capital contribution in relation to the loans and liabilities.
DOCUMENTS/INFORMATION REQUIRED TO PREPARE CMA:
- Past 2 years Audited Financial
- Provisional Financial for the current year; in the absence of provisional financial, details of the top line shall be essential
- Latest Sanction letter (in case of renewal)
- Term Loan Repayment Schedule, if any
- Details of proposed enhancement (if any) along with the terms and conditions
BENEFIT OF SUBMITTING CMA REPORT:
By submitting CMA data report with right ratios and proper presentation of usage of funds, your chances of getting the loan has been increased. Provided you follow other procedures and requirements of banks.
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