A number of studies suggest that sole proprietorship is the most common form of business organization in India. But often sole proprietors find it difficult to avail credit to fund working capital needs and improve positive cash flow position. A large percentage of sole proprietors meet working capital needs through soft loans and bootstrapping financing options. Most lending institutions even require sole proprietors to pledge their personal or business assets as collateral to avail small business loans on favourable terms. There are many avenues of taking Small Business Loans for Sole Proprietors, here are some of them.
7 Conventional and New Age Small Business Loans for Sole Proprietors
1) Term Loans
Many sole proprietors still opt for conventional small business loan products like term loans. Term loans enable the borrowers to avail credit at fixed interest rate and repay the loan with fixed EMIs. Hence, it becomes easier for sole proprietors to predict monthly payments and manage cash flow position. But many lending institutions do not provide term loans to new entrepreneurs. They require the borrower to have excellent personal credit score to avail term loans. Hence, sole proprietors have been switching from term loans to new age small business loan products. You can read to know more on how your personal credit score impact your business.
2) Revolving Credit
Unlike other small business loan products, revolving credit enables sole proprietors to avail credit and use funds only when the need arises. The credit limit further gets renewed automatically when the borrower pays off the debt. Hence, many sole proprietors opt for revolving credit products like overdrafts and credit card loans to access credit without paying monthly installments. They can even avail some of these revolving credit products by paying a commitment fee to the lending institutions.
3) Merchant Cash Advance
This small business financing option is designed as an advance. The sole proprietors accessing debit and credit card payments can take advantage of merchant cash advance to meet working capital needs by receiving a lump sum amount as advance. But he needs to sacrifice a percentage of daily card sales towards repaying the advance. However, the merchant cash advance provider will determine the amount of advance based on monthly credit/debit card sales. Many merchant cash advance providers even offer advance at higher interest rates.
4) Invoice Discounting
In addition to providing a variety of small business loan products, many lending institutions nowadays offer invoice discounting service. A sole proprietor can opt for invoice discounting to avail credit quickly by discounting his unpaid invoices. However, the invoice discounting service provider will provide advance which will be a percentage of the real value of the invoices. Some lending institutions even require borrowers to sign a tripartite agreement to receive payment directly from the buyers when the invoice is due. The sole proprietors can use invoice discounting as an alternative to conventional business loans to access credit quickly. Business owners can read more on what is invoice discounting and the benefits of invoice discounting.
5) POS Based Loans
Like merchant cash advance, POS-based loans also enable sole proprietors to avail credit based on their monthly debit and credit card sales. Many new age lending institutions even form partnership with EDC terminal providers to provide credit quickly and conveniently. The sole proprietors can opt for POS-based loans to avail credit based on the monthly sales routed through EDC terminals. The lending institutions even allow borrowers to repay the POS-based loans through multiple repayment options. Many lending institutions even also sole proprietors to repay the loan through daily instalments.
6) P2P Loans
The peer-to-peer (P2P) lending platforms make it easier for sole proprietors to avail credits by connection them with lenders. They bring borrowers and lenders together by creating a virtual marketplace. The option enables sole proprietors to access credit by communicating and negotiating with the lenders directly. They can even communicate with the lenders and avail credit online. The sole proprietors even have option to avail P2P loans through a number of P2P lending platforms.
7) Mudra Loans
The Government of India has launched the Pradhan Mantri MUDRA Yojana (PMMY) with the intention to make credit available to non-corporate and non-farm enterprises. The sole proprietors can avail credit through distinct categories of Mudra loans – Sishu, Kishore, and Tarun. They can avail credit up to Rs 5 lakhs under the Kishore scheme and Rs 10 lakhs under the Tarun scheme. Many sole proprietors opt for Mudra loans to avail credit on flexible terms and at lower interest rate.
Unlike nationalized and commercial banks, the non-banking financial companies (NBFCs) and fintech companies helps sole proprietors to access credit quickly. These new age lending institutions also enable sole proprietors to avail more credit based on real time data like monthly cashless sales and value of unpaid invoices. That is why; many sole proprietors in India nowadays avail credit from NBFCs to avoid strict credit requirements and lengthy approval process.