In January 2016, the government launched its Start-up India programme to encourage more entrepreneurs in the country. In the previous year, India had more than 4,200 start-ups, taking its global position to the third rank, according to a report published by NASSCOM. This report also indicted that around 65% of these start-ups were located in Bengaluru, Delhi NCR and Mumbai, with the emerging start-up hubs identified as Chennai, Hyderabad, Pune, Ahmadabad and Jaipur.
Apart from start-ups emerging across the country, India recorded capital investment of $9 billion in such ventures in 2015, according to data published by Your Story. While all these data-points make the environment for start-ups appear very encouraging, the truth is that most small companies are strapped for funds. It is not easy for these ventures to either secure funding or get a loan for business in India.
Challenges Faced by New Businesses
We are living in interesting times, when new ideas are transforming into business models and idea owners are taking the entrepreneurial plunge. While this is true, most businesses do not have the required funds to produce their innovative offerings. This is because they turn towards traditional banking institutions to secure loans for business in India. These traditional banking institutions are sceptical of providing loans for a small business. They have stringent eligibility criteria, conduct hard credit inquiry and require collateral for offering loans. Most of the small businesses do not have the required collateral or a good CIBIL score to ensure funds for their business needs.
Easy Loan Available Online
The year 2015 not only saw thousands of start-ups taking shape across the country, it was also the year that saw the FinTech segment gaining a strong foothold of the Indian financial sector. FinTech companies make use of cutting-edge technology to offer innovative financial products to satisfy the diverse and growing need of loans for business in India.
Advantages of securing loan for small business from FinTech companies include:
Online Loan Application: With FinTech companies, a loan for small business can be applied for online. While many banks provide online access to their loan application form, you would still need to download the form, fill it up and take it to the bank. This is not the case with FinTech lenders. You can fill the form online and upload all the required documents from anywhere and at any time. The great news is that the application process takes just 10 minutes to be completed, provided you have the business documents ready. On the contrary, banks offering loans for small business require the owner to make several visits and spend hours just to complete the application process. In fact, the leading FinTech lenders have mobile apps to make the application process even simpler.
Fewer Documents Means Hassle-Free Application: Apart from being able to apply for the loan online, FinTech lenders require only a few documents to be furnished. This means that one can apply for a loan for small business without having to get a cumbersome file of financial documents ready and audited.
Fast Approvals: For any loan for business in India, timing of receiving the funds is crucial. Since FinTech firms use technology, they are able to determine the creditworthiness of the company in a matter of hours. In fact, leading FinTech lenders are able to approve a loan and disburse the funds within 3 days.
Flexibility of Loan Amount: Different companies require different loan amounts at different times. The loan amount would vary depending on the size of the business and whether the funds are needed for working capital needs or for expansion and growth. FinTech lenders are willing to provide loans for business in India from as low as ₹1 lakh to as high as ₹3 crore.
Flexible Loan Tenure: Traditional banking institutions have fixed loan tenures for loans for business in India. On the other hand, FinTech companies offer flexible repayment plans, ranging between 30 and 180 days, depending on the business model of the company.
No Prepayment Charges: If a company has the funds to repay the loan earlier than the loan maturity period, FinTech lenders permit this without charging any fees. Banks typically either do not permit prepayment or levy a charge on prepayment.
Unsecured Loans: Most entrepreneurs applying for a loan for new business do not have any collateral. FinTech lenders offer loans without the business having to pledge any assets as collateral.
Understanding the Use of Technology by FinTech Lenders
Technology is changing the way loans are delivered to businesses in India. FinTech companies have revolutionized the entire process of loan application, sanctioning and repayment. These companies rely on alternative data-points to determine the creditworthiness of a borrower. Here are the things a FinTech company would look at:
- Mobile phone records: With India being the world’s second-largest market for mobile phones, huge amounts of data are generated by these devices. These include phone calls, text messages, Internet browsing and bill payments. FinTech lenders are able to use such data to determine the credit risk associated with the business owner.
- Social media scoring: On an average, people spend more than half an hour daily on social media platforms. FinTech lenders can assess the credit risk associated with the business owner from their activity and networks on social media.
- Online payments: We purchase things online and make bill payments online. This data can also be used to determine the creditworthiness of an applicant.
- Assessing the personality of the business owner: Several NBFCs offering loans for business in India have partnered with the Entrepreneurial Finance Lab (EFL), a Harvard University incubated firm that uses psychometric tests to evaluate the creditworthiness of borrowers.
FinTech companies have automated the underwriting process, lowering their operating costs, which translates into lower interest rates for loan for small business.