Why SMBs are moving towards online money lenders
SMBs(small and medium businesses) have always found it tough to borrow capital from large public and private sector banks. And since the financial depression in 2008, it has become even more difficult. Banks all over the world have made it tougher for SMEs to borrow working capital, while large corporations have had less trouble in procuring loans.
Over the last 5 years, several online lending startups like IndiaLends, Lendingkart, Capital Float, LoanXpress(launched only in 2015), FairCent, have been trying to make it easier for SMBs to acquire capital.
This has taken two forms: some firms disburse loans to SMEs as NBFCs(Non Banking Financial Corporations) and others are involved in P2P(peer to peer) lending, portals where individuals can register as either lenders or borrowers. P2P lending has proved helpful particularly for fledgeling startups and businesses who need quick working capital upto 5 Lakhs. NBFCs have higher eligibility criteria.
A biggest advantage for customers of these new-age lenders is the quick turnaround time. For small businesses, capital at the right time is everything. PSU banks can take upto 3 months to process documents and approve a loan request. Moreover, they might take weeks after that to actually release the money. While the situation is better in private sector banks, the process is still doc-intensive. But through these portals, documents are verified quickly and funds dispersed within a week.
Due to the higher interest rates, these lenders are offering loans without collecting collateral. At the same time, for loans upto 50 Lakhs, the eligibility criteria is also higher with lenders expecting the SMEs to be at least a few years old and 1 crore turnover every year.
P2P lenders like FairCent inform borrowers of the risk in lending to a particular loan applicant and also the corresponding returns. High return rates up to 36% are available on few loans. Pratapsingh Nathani’s LoanXpress act as borrowers’ representatives and help SMEs get loans from NBFCs and banks through proper representation. Improper representation is one of the key reasons why SMEs aren’t able to secure loans.
A comprehensive study carried out by Dr.Yadav from the Bank of Baroda staff college in Ahmedabad had some very interesting statistics.
In their defence, the study also shows the reasons cited by banks for SMEs defaulting on bank loans.
The situation has to improve at both ends of the spectrum. It is good that the SME-specific lenders are doing well, which is evident from Lendingkart’s recent Series B funding of $32 Million earlier this year. On the other hand, banks must start improving their service to the SMEs.
This could be done by initiating carefully thought out schemes that would target SMEs. A healthy balance must be struck between traditional and nontraditional funding sources. Banks cannot ignore companies which employ 40% of our country’s workforce and contribute nearly 20% to the GDP.
Pravir Ramasundaram is our in-house content writer at ContractIQ. Keep coming back to read more from him on mobility & outsourcing.