There are many kinds of business entities in India categorized as private limited, public limited and one person company also called as proprietor firm. Every business owner requires working capital to run their business or for personal use and most rely on taking loan. In case of proprietor based firms, single individual is the owner of the business establishment and has legal rights to own the assets and manage each and every operation.
For a proprietor, arranging money to keep the company functional is difficult as they have to mostly rely on their own money. And due to the risk associated with the business, since dependability is on one individual, lender takes cautious approach to offer loan. Banks do not want to bear a loss if such individual defaults.
So how to get personal loan if you are a proprietor? And who offers financing to the owner of such firms?
Firstly owner will have to get loan on his/her individual capacity since it is an unsecured loan. If you want financing for setting and running small manufacturing plant, service company etc. then there are multiple options to get loan to meet the requirement as follows:
Government loan (Mudra loan): Pradhan Mantri Mudra Yojana, an initiative by the Government of India offers finance to – manufacturing, trading and service sector units in rural and urban areas. These loans are offered by public, private, regional rural, urban co-operative banks, state-co-operative banks, micro finance institutions, non-banking finance companies in collaboration with the government.
Financing below Rs. 10 lakh are offered under Mudra loans and borrower needs to apply at the local branches of these financiers. Then the application will be reviewed and further processing will take place.
Micro finance companies: There are many such companies sanctioning the loan amount on the basis of just the income generating capacity of the borrower, management quality, cash flow, etc. Although micro enterprise gets small loan amount, proprietor or owner of such firms has a good chance to get loan to start or run the business. Every micro finance institution has their own eligibility criteria. For e.g. L&T Microfinance offers loans only to women borrowers, Agora finance offers loans only when applicant produces 2 guarantors amongst other criteria.
Against fixed deposit: If proprietor has FD account with the bank, then he/she can take personal loan against FD. The loan amount in this case is typically 80%-90% of the FD amount kept with the bank. Interest rate is also low as borrower is pledging FD as a security with the bank and most of the banks do not charge extra for prepayment closure. Almost every bank in India offers such kind of financing. Your FD investment remains intact.
Against securities: Another way to get personal loan for proprietor is by pledging securities such as mutual fund, equities, life insurance policy, exchange traded funds and savings bonds. Loan amount in this case is calculated depending on the type of the security kept. For e.g. in case of mutual fund/shares; loan amount is 50% of the current value. If you pledge insurance policy or bonds then there is a minimum and maximum amount cap which differs for each bank.
Against property: Another option for a proprietor to meet personal or business goal is by taking loan against property (commercial or residential or land). Property is kept as collateral with the bank. Instead of selling and arranging money, proprietor can mortgage property get personal loan against it. If tenure is short term then such loan should be taken. The cost of loan is low due to lower interest and amount which is nearly 50%-60% of the property value is given. And during the tenure of the loan, property cannot be sold/rented.
Loan from banks: This is a traditional option for a proprietor to apply for a personal loan at a bank. However lender may be hesitant to approve the loan because of the risks involved as there is no security or guarantor. This is the reason lenders have strict eligibility criteria before processing such applications. For e.g. ICICI Bank offers personal loan to proprietorship firm but with following eligibility criteria:
Minimum turnover of Rs. 40, 00,000 for non-professionals
Minimum profit after tax should be Rs. 2, 00,000 for proprietor firm
Likewise every bank has its own criteria for approval.
Remember, if loan application is completely genuine, business is conducted with fair practice, honestly, with complete transparency, and proprietor has a good credit history with excellent repayment history (if any) then there is always a good chance to get loan.