Purpose

To meet the financial requirements of the business. It could be for the purchase of new plant and machinery, to replace the existing plant and machinery, building infrastructure, expanding the business, and so on, that is required to take the business to a greater level. Also, working capital finance is extended to provide for the day to day operational cost of the business.

Quantum

The quantum depends on the project for which the finance is required. The assessment is based on the vision of the business which is depicted in the projected financial statements for years up to which the repayment is fixed, the profile of the promoters, expected cash flow from the business which will give an insight as to the repayment capacity. 

For projects where the loan required is above 2 Crores, the project appraisal will be done by a team of skilled persons from the Project Finance Department (PFD) of the bank/financial institution. Based on the viability report of the PFD and considering various other factors like the liquidity ratio, the DSCR, i.e., Debt Service Coverage Ratio, the Fixed Asset Ratio, etc., the quantum will be decided.

Interest

The rate of interest will vary from lender to lender and will be in the range between 11% p.a. to 20% p.a., depending on the loan quantum, the project for which the finance is sought, line of activity, the business sector, and the customer's profile.

Security

The security depends on the quantum of loan and also the business sector. For a loan up to 2 Crores to MSME Sector, no collateral security is insisted. The loan will be covered by the Credit Guarantee Scheme. Normally the primary security will be by way of hypothecation of the stocks and receivables if the finance is for working capital and hypothecation of the assets created out of the bank finance if the loan is for capital investment. Collateral security by way of residential/commercial property will be required. The agricultural property will not be accepted unless the finance is for agricultural and allied activities.

Repayment

The working capital finance is short-term finance provided for a period of 6 to 12 months which will be renewed on an annual review. The repayment period for term loans ranges from 3 years to 8 years and even till 20 years if the construction of business premises is involved.

Processing fee

Processing fee also depends on the nature of the activity and the business sector but generally will range from 0.25% to 2% depending on the bank/financial institution.

Pre-payment charges

Some of the lenders do not collect any pre-payment charges while others charge 2% to 4% on the outstanding balance.