Entrepreneurs can ask your bank to provide you a loan under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Scheme. Under this scheme your bank will provide loan without any collateral. Please check the details provided in www.cgtmse.in and www.dcmsme.gov.in before you visit your bank.
Non-farm entrepreneurs can obtain credit facilities for both working capital and term loan requirements by getting a General Credit Card (GCC) from the bank.
A GCC is issued as a smart card/debit card (biometric smart card compatible for use in the ATMs/handheld swipe machines and capable of storing adequate information of entrepreneur’s identity, assets and credit profile, etc.). Wherever accounts are not digitized, the GCC may be issued as a card/passbook or a credit card-cum passbook incorporating the name, address, photograph of the holder, particulars of borrowing limit, validity period, etc., for the time being which will serve as an identity card as well as facilitate recording of transactions on an ongoing basis.
The limit on the card will be fixed by the bank on a case-to-case basis based on a risk assessment. The rate of interest on the loans obtained through GCC will be decided by the bank. As an entrepreneur, you are expected to know how much the bank charges on your loan.
The Banking Codes and Standards Board of India (BCSBI) has prescribed timelines for disposal of loan applications that are complete in all respects and are accompanied by documents as per the ‘checklist’ provided. The banks which are members of the BCSBI have to adhere to the following:
Financing with Own Capital
A vegetable seller puts in his own capital of Rs. 2,000 and buys vegetables from a farmer. He pays Rs. 100 in rent per day and Rs. 50 in wages per day to a helper. He sells the vegetables for Rs. 2,500. The Rs. 100 in rent and the Rs. 50 in wages paid are called 'Operating Expenses’. The Rs. 2,000 spent on buying vegetables for selling is the ‘Cost of Goods Sold’. The profit in this case is computed thus:
Profit = Selling Price – Cost of Goods Sold – Operating Expenses = 2500 – 2000 – 150 = Rs. 350
Cash Credit against Hypothecation of Stock
Suppose the vegetable seller does not have his own capital to buy all the vegetables he requires or he wants to expand his business. In such a scenario, he can take a loan from the bank by offering the vegetables to be purchased as security. This type of financing is called cash credit where the bank lends against self-liquidating security.
The whole amount of the bank loan need not be drawn, only the amount needed based on current requirement. The interest on this type of facility is charged only on the outstanding and not on the entire loan limit.
In business, it is often necessary to provide credit, which means to accept payments from customers on a future date as per agreement. When that happens, there is not enough money to buy supplies for the next day and pay for other obligations like rent and wages. The payments that are to be received at a later date as per agreement are called receivables and the customer who is expected to pay at a later date is called a debtor.
In such a situation, when money from sales is delayed, business need not stop for want of funds. The vegetable seller can go to the bank and request lending against receivables. The bank provides finance against the amount of receivables after reduction of margin. Interest on the loan is charged only on the outstanding amount of the loan.
Purchasing Fixed Assets and Accounting for them
Now that the profits have increased, the vegetable seller decides to buy a table and chair for the shop. Suppose he buys furniture for Rs. 200.
He is now in a dilemma. Should he reduce this entire cost of Rs. 200 from this year’s profit, even though he will be using the furniture for the next ten years? If he does, his profit will reduce by Rs. 200. So, instead, the vegetable vendor decides, since the life of the furniture is ten years, that for this year he will allocate funds towards only 1/10th of the cost. When he does this, the amount to be charged to the current year as expenses is called depreciation.
Items bought for running the business that are going to be used for more than one year are called Fixed Assets. Examples of fixed assets include land, building, machinery, equipment, etc.
Depending on the life of the fixed asset, every year the value of the fixed asset has to be reduced. This reduction is effected by setting apart the reduced amount as an expense which is called depreciation.
As the business grows, the vegetable vendor realises that since vegetables are perishable, he had to throw away a fair amount which is not bought by customers. This in turn was eating into his profits. He feels that if he had a cold storage system he may be able to increase the life of the fresh vegetables and cut down on wastage. He makes enquiries for a freezer; a good freezer will cost him about Rs. 20,000. The vegetable vendor learns that he can avail a loan through http:// udayamimitra.in and applies. His loan is sanctioned at an interest rate of 10 per cent per annum. With the loan money he buys a freezer and is now able to keep the vegetables fresh for an additional two days. This, in turn, lead to an increase in profits for the vegetable vendor.
The vegetable vendor’s total sales figure was Rs. 10 lakhs and the cost of goods sold was Rs. 8 lakhs. The vegetable vendor thus made a gross profit of Rs 2 lakhs. He paid Rs. 36,000 and Rs. 18,000, respectively, on rent and wages (assuming 360 days in a year). His cash credit outstanding was Rs. 2,000 at the end of the year. For simplicity in understanding, assuming the outstanding was Rs. 2,000 each day of the year, he paid a total interest of Rs. 200 on the cash credit outstanding. He repaid Rs. 6,000 towards the term loan on the last day of the year and the term loan outstanding on the balance sheet is Rs. 14,000. An amount of Rs. 2,000 was charged as interest for the year on the term loan. So, the total interest paid for the year is Rs. 2,200. A depreciation of Rs. 2,000 on the freezer and Rs. 20 on the furniture was claimed as expenses for the year amounting to a total depreciation of Rs. 2,020 (depreciation rate of 10 per cent assuming a ten-year life for both freezer and furniture). The fixed assets net of depreciation is Rs. 18,180 (Rs. 20,000 – Rs.2,020).
Profit and Loss Statement
|Sales : Rs 10,00,000||Assets|
|COGS : RS 8,00,000||
Cash : Rs 1,39,100
Receivables : Rs 2,500
Fixed assets : Rs 18,180
Total assets : Rs 1,59,780
|Gross profit : Rs 2,00,000|
Rent : Rs 36,000
Wages : Rs 18,000
Operating profit : Rs 1,46,000
Interest : Rs 2,200
Depreciation : Rs 2020
Profit before tax : 1,41,70
Cash credit : Rs 2000
Term loan : Rs 14,000
Owners capital : Rs 2,000
Retained profits : Rs 1,41,780
Total liabilities : Rs 1,59,780
Your enterprise is in stress and you apprehend failure OR You are not capable of paying your debts OR There is erosion in the net worth due to accumulated losses to the extent of 50% of your company’s net worth during the previous accounting year.....
In the above situations, you can make an application to the bank branch or to the committee that is constituted at the district/divisional/regional level by the bank. The bank/committee will explore various options to resolve the stress in your account, such as
Trade Receivables Discounting System (TReDS): Do you face the problem of delayed payments from your buyers? If yes, you can discount your receivables through TReDS. Three entities licensed by RBI, viz. RXIL, Mynd Solution and A.TReDS, operate the TReDS platform.
Certified Credit Counsellors : Are you hesitant to apply to banks for MSME loans due to lack of knowledge on preparing business proposals, maintaining financial documents, etc.? You may approach Certified Credit Counsellors (CCCs) who are registered by SIDBI. A list of such counsellors is available at: https://udyamimitra.in/ Home/CCC. These counsellors may assist you with business decisions.