SOLV Dictionary #1: 5 Business Finance Terms You Need To Know

Running a business means being on a constant learning spree. Whether you are just starting out on your entrepreneurial journey or you are a seasoned small business owner looking to expand, the need for continuous learning is universal. No matter what stage you are at, there will be new tools to explore, problems to solve and vocabulary to understand.

The good part is that you don’t have to be a financial whiz to understand the world of business finance. Here are some key business finance terms and definitions, that you will find useful as a business owner. 

1. Goods & Service Taxpayer Identification Number (GSTIN)

Taxpayer Identification Number (TIN) is a unique 11-digit number assigned to any business for it to be easily identified by the commercial tax department of the state. TIN registration was mandatory for all manufacturers, traders, exporters, and dealers. After the implementation of GST on July 1, 2017, TIN is now replaced with a 15-digit GSTIN (Goods and Services Tax Identification Number).

2. Collateral

Any asset that is pledged as security while taking a loan is called collateral. Lenders often require it to be sure that they won’t lose their money in case the business defaults on the loan. If a business fails to meet the requirements of the loan, the pledged asset can be seized by the lender. The collateral can be a fixed asset (property), moveable (vehicle) or general charge (stocks & receivables). Based on the value of the loan, banks may ask for multiple types of collaterals (general charge + fixed assets). In the case of multiple lenders, banks or financial institutions may ask for Pari Pasu, that is, equitable charge over the same asset, or exclusive/first charge over a certain asset.

3. Unsecured Loans

Loans that are not backed by any asset/collateral are called unsecured loans. Since these loans present a greater risk for the lender in comparison to secured loans, there’s a higher interest rate involved. These loans are usually of lower ticket size or lower amount.

Banks, at times, provide larger loans without any security to large enterprises based on their repayment capacity and established cash flows.

Of late, partially secured loans have started making an impact in the market. Herein, the financial institutions ask for collateral of a value lower than the loan value. Such loans also need to be supported by the repayment capacity and established cash flows.

4. CIBIL Score/Bureau Score

A summary of an individual’s credit history derived using the Credit Information Report (repayment history of loans over a period) is called the CIBIL score.

CIBIL Score is a 3-digit number ranging from 300–900; a higher score signifies a stronger credit profile. This score is the primary screening filter used by financial institutions while reviewing a loan application. A lower score is usually a sign of delay or non-payment of obligations towards the lending institutions. A delay in credit card payment, non-payment of housing loan EMI for more than 90 days, default on loan by a borrower where you were a guarantor can also affect the CIBIL score adversely.

This score is enabled by RBI norms where all the financial institutions are mandated to share the credit history of all their customers with all the bureaus. While CIBIL is the oldest bureau in India, there are other bureaus as well, namely, Experian, CRIF, and Equifax.

5. Invoice Financing

A way for a business to borrow based on the transaction. Under this, the bank disburses the borrowing amount equal to the value of the invoice. In some cases, banks pay the invoice amount directly to the seller. The repayment period/tenure of this is usually linked to the working capital cycle of the business. This product works as a limit, wherein the limit gets reinstated to full with every repayment.

Invoice Financing

7 Government of India Schemes to Empower Women

The small and medium enterprise sector in India contributes to over 45% of India’s industrial output, forming 40% of the GDP output1. A small part of this output is also contributed by women entrepreneurs.

According to the Sixth Economic Census released by the Ministry of Statistics and Programme Implementation in July 2018, women constitute only 14% of total entrepreneurs in India – that is, 8.05 million out of the total 58.5 million. The reason for this low percentage is that women face a lot of social stigma when it comes to starting a business.

Also, at the lower end of the economic strata, women are raised with an expectation to pursue household duties and denied requisite educational and networking opportunities critical for starting a business. In addition, there are other challenges faced by women entrepreneurs in India, such as:

  • Safety and security: Entrepreneurship involves working odd hours and travelling to remote places women therefore tend to be more wary of pursuing opportunities in the face of risks to one’s personal safety and security.
  • Personal commitments: Women are often responsible for managing the household, in addition to running a business, and this puts them in a difficult position when it comes to devoting time for growing the business.
  • Assertive peer behaviour: Women entrepreneurs tend to face aggressive behaviour of peers and this proves detrimental to a woman trying to succeed as an entrepreneur.

Several of these challenges will take time and societal shifts to fix. However, the good news, is that there are areas like financial services and training initiatives that can provide much needed impetus to women entrepreneurs.

Business Loans for Women

Not so long ago, women entrepreneurs found it hard to get finance for their business due to prevailing social assumptions. But with the advent of fintech platforms, new doors to opportunities have opened for aspiring women entrepreneurs. These platforms have enabled self-employment for women in both urban and rural India.

Benefits of Business Loans for Women

Business loans help women entrepreneurs streamline business operations, production processes, eliminate cash-flow disruptions and expand to new markets. It also empowers Indian women to challenge social norms and become economically independent. And with economic independence comes social value and financial growth. 

Financial growth also tends to attract investors and partnerships for a business enterprise, thereby enabling a future full of exciting opportunities. This infuses confidence to interact with fellow business owners and work with big clients.

With the right kind of financial help women can:

  • Put their plans into action by grabbing opportunities that come their way
  • Be their own boss by retaining control of their enterprise and keeping the valuable assets protected
  • Reduce cash-flow risks by bringing order to the working capital fund
  • Build credibility and goodwill for business

Government Schemes for Developing Women Entrepreneurship

A big part of setting up a business is making capital available. And to help aspiring women entrepreneurs realise their dream, the Government of India offers several schemes. A brief summary of 7 such schemes is presented below:

1. Shringaar and Annapurna

Bhartiya Mahila Bank (now a part of the State Bank of India) offers several loans namely, Shringraar (for beauty salons, spas), Annapurna (for food catering business), Parvarish (for day care centres) and Kitchen Modernisation Loan (for maintaining and upgrading the kitchen). The more popular ones being Shringaar and Annapurna:

  • Women between the age of 20 to 60 years are eligible to apply for collateral-free loan under these schemes
  • For the Shringaar loan scheme, the maximum loan amount offered is up to Rs 10 Lakhs and for the Annapurna scheme it is up to Rs. 50,000.
  • For the Shringaar scheme, the loan tenure is 7 years and for the Annapurna scheme the tenure is 3 years
  • Shringaar scheme partners with Naturals, Cavin Kare and Lakme

2. Stree Shakti

Introduced by the State Bank of India during 2000-01, this scheme caters to women who own businesses. It offers collateral free loans of up to Rs. 5 lakhs.

  • To avail this loan, women need to own at least 51% of the business
  • Any woman can avail a loan of up to Rs. 50 lakhs
  • The tenure changes basis the loan amount

3. Orient Mahila Vikas Yojana Scheme

Launched by Oriental Bank of Commerce, Orient Mahila Vikas Yojana offers loans to women for starting a business on their property. This is a collateral-free loan ranging between Rs. 10 to 25 lakhs.

  • This loan is offered to women who hold a 51% share capital of their property
  • The loan has to be repaid within 7 years

4. Dena Shakti Scheme

Dena Bank’s Shakti Scheme is for women entrepreneurs who need financial assistance in the field of agriculture, manufacturing and other small businesses. Herein, loans of up to Rs. 20 Lakhs are sanctioned for education, housing or retail trading and loans of up to Rs 50,000 are offered under the category of micro credit.

  • Women entrepreneurs with more than 50% ownership of a business can apply for the Dena Shakti Scheme
  • The repayment tenure is flexible, lasting up to 10 years

5. Udyogini Scheme

This loan scheme launched by Punjab and Sindh Bank is for women in the field of agriculture and other small businesses. The maximum loan amount is Rs. 1 lakh depending upon the family income.

  • The loan is available to women between 18 to 45 years of age
  • For widowed, destitute or disabled women, and women belonging to the SC/ST category, a subsidy of 30% of the loan is provided; for women belonging to the general category, a subsidy of 20% of the loan is provided
  • Loan repayment tenure varies based on the loan amount

6. Cent Kalyani Scheme

Launched by Central Bank of India, this loan scheme is ideal for women managing SMEs, involved in agricultural work or engaged in retail trading. Under this scheme, loans of up to Rs. 1 crore are sanctioned so as to promote sustainable employment opportunities for Indian women.

  • No collateral or guarantors are required
  • Loan repayment tenure is up to 7 years

7. Mahila Udyam Nidhi Scheme

Launched by Punjab National Bank, this scheme helps women set up new projects. Under this scheme, different plans are offered for the purchase of auto-rickshaws, beauty parlours, day care centres, etc. Loans of up to Rs. 10 Lakhs are sanctioned.

  • Repayment tenure is up to 10 years

Source: 1 MSME Annual Report, 2017-18

What are Unsecured Business Loans?

An unsecured business loan may be used for various business purposes like business expansion, to meet working capital needs, buying land or property, purchasing plant or machinery, hiring staff, training employees, purchasing raw materials, enhancing stocks and inventory, etc.

It’s a fast and easy source of raising business finance and is a great alternative to traditional business loans/secured loans which are associated with:

  1. time-consuming processes
  2. collateral or security from the borrower

Most of the times, small business owners do not have assets to pledge as collateral, and such situations call for unsecured business loans or collateral-free loans. A business owner can procure funds without having to worry about pledging any asset.

Unsecured loans help businesses finance their growth over time. Such financing is especially valuable to small businesses as it can cater to sudden needs of the business without a long-term commitment to the Lender.

Business Loans vs Overdraft

Categories Business Loan Overdraft
DefinitionFixed loan amount borrowed for a definite period of time, against collateral (if secured loan) and to be repaid with interest rate in the form of EMIsAmount can be withdrawn even if the bank account balance of the borrower is zero or below
Loan TypeBorrowed CapitalCredit Line
Interest Rate ChargedOn sanctioned loan amountOn overdrawn amount
Availed AsLong-term LoanShort-term funds
Repayment TypeIn the form of EMIsFrom bank deposits
Interest Rate CalculationMonthly BasisDaily Basis
Loan Amount or Borrowed FundsDepends on business requirements, applicant’s profile, credit score, etc.Depends on the amount of money in current account, relationship with the bank
Does the applicant need to be an account holder of the bank?No, the applicant is not required to be the account holderYes, the borrower has to be an account holder to avail overdraft facility

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