SUKANYA KUMAR Founder & Director, RetailLending.com | Dec 01, 2015, 04.16 PM | Source: Moneycontrol.com
While lending money, lenders are keen to ascertain the repayment capacity of the borrower. No wonder, net income of the borrower plays a crucial role. However, there are some ways out to raise money despite low net income.
Almost all the times we find lenders doing loan on basis of your actual net income, which is the safest option. However, given the high levels of cash transactions in many businesses, it becomes a bit difficult for many businessmen and professionals to report high net income regularly. Low net income does not necessarily mean that such businessmen are bad borrowers. Over a period of time, banks have realized this. They have developed loan products that enable a businessman or a professional to borrow for his home buying or to raise money against his property (loan against property -LAP) without having much to show in papers.
These loan products are for those who have proven track record of other loan repayment and/or sustainable business for many years in specific industry and also a reasonably healthy bank balance.
Here are a few of those loan products discussed hereunder:
Other loan track: There are many businessmen, who have accessed big loans such as such as, equipment loan, mortgage, commercial vehicle loan. They have been repaying the existing loans without any default. In such circumstances, a bank may look at such a borrower as a promising customer. A bank may want to lend to such a borrower a sum equal to or less than his previous loan. For example, a businessman borrowed Rs 50 lakh for machinery from Bank A three year back. For last three years, he has been sticking to his loan repayment schedule. In such a scenario, bank B may consider lending him a sum of Rs 50 lakh or lower. Typically bank B may offer him a sum equal to a fraction of his earlier loan, say 80%, which makes it Rs 40 lakh in the aforesaid case. However, the catch is, the other loan should not have been closed or paid-off more than six months ago.
Bank balance: If the borrower has a healthy bank balance and the average monthly balance can well-substantiate the new EMI for the home loan/LAP he wants to take, this could be accepted by the lender.
EMI equaliser: Depending upon the total other loan EMI-s, a borrower is already servicing, the new home loan/LAP can get approved. A market average of 1.5 times of the current EMI is allowed as the total exposure. For example, if someone is already paying Rs 2 lakh as his all other EMI-s put together, then he can be allowed another Rs 1 lakh as additional EMI for the new loan, which will be an approximately Rs 1 crore borrowing.
Same loan track: During a home loan transfer, if the borrower doesn’t want to go through the hassle of doing the paperwork again, then basis the previous track on the same loan, the transfer can happen. The reduced EMI in the new bank can also make for some room to borrow an additional amount as ‘top-up’ loan (cash in hand) without any additional documentation.
Gross profit method: For an industry where the turnover is very high but the profit margin is always low (trading business), the lenders do approve of the calculation basis the gross profit and not the net.
Turnover based on industry margin: If the borrower is in a manufacturing or trading business then a standard profit margin has been internally set by the borrower. For example, a manufacturing unit with Rs 2 crore of turnover is expected to make a 10% profit and thus the income can be considered as Rs 20 lakh and basis this the loan application can be granted, even if it is not shown. Similarly, for a trading business, it could have been set at 5% as there are no assets such as machinery, plant, semi-finished goods. A manufacturing unit typically has such assets and been flagged at a little higher risk grade. At the same time, a service industry may not be considered for this type of surrogate funding at all.
Gross receipts: This programme is applicable for self-employed professionals like chartered accountants, architect, engineer, doctors, who though receive a high gross amount, their net profit may get eroded through salaries to their staff or other establishment costs. For them, a special eligibility calculation method is adopted by the lenders on the gross receipts.
Liquid income programme: An estimate is drawn by a team of chartered accountants appointed by the lender who visit the work premise of the borrower to know the minute details of the business. For example, if someone has a business of stationery-shop or saree-sales or sending truckload of sands from one destination to another, it is not very sure how much of documentation is in place. Most transactions are done without proper bill and challan and sometimes are multiple transactions without a receipt. However, these could be quite profitable business and safe to lend.
No income proof (60:40): If the borrower pays 60% of the property cost towards acquisition and his credit score is fine, then without considering his income-documents, 40% is funded as home loan. This is due to the majority stake (investment) in the property by the borrower, which makes the lender comfortable, especially when he hasn’t had any bad credit history earlier.
Premium relationship pre-approval: Some banks have this facility to offer you a ‘pre-approved’ loan, basis the borrower’s profile and his banking relationship in terms of deposits and investments made through their banking channel. This doesn’t require submission of any income proof and only the mandatory KYC norms to be met with.
So, do not lose your heart if your net profit shown is not too high but you are confident of paying off the loan. There are lenders who understand your business and will help you get the funding too.
It is important to note that a borrower’s assets are not considered as income as many make that mistake of believing that if he owns properties worth Rs 10 crores, the lender will be happy to give him a loan. It is not so. A borrower needs to have regular flow of steady income for the lender to extend even the first rupee.
Source : http://goo.gl/3eAL7c
Go for angel or VC funding if cashflows are likely to be uncertain. Else, borrow from family and friends
Anil Rego | July 25, 2015 Last Updated at 22:04 IST | Business Standard
Financial planning is crucial for any entrepreneur. That’s because entrepreneurship is a high-risk choice that can impact one’s personal as well as family’s well-being. Once salary income stops, it becomes much more difficult to take care of regular expenses such as equated monthly instalments (EMIs) for repaying home loans. This is especially so if your spouse is not working. After assessing cash flow requirements, the next step is to realign existing assets to provide a monthly income. Look at the worst possible scenario and assess how much time you would give yourself to exit the business if it is not successful. It is advisable to plan for three to five years of monthly income, or till business cashflows stabilise.
By doing this beforehand, you will know the time you have to self-sustain the business, or abandon the venture and get a job.The financial plan should include both the business as well as personal life goals, since both are integrated with one’s financial well-being.
Cashflow is the lifeline of any business. Unlike salaried income, cashflow from business is likely to be irregular. You need to forecast the cashflow requirement not only for the start-up phase but also when the business grows to different stages. In the initial years, you may have to fund the operating expenses of your business as well as your family’s personal expenses.
For example, if your monthly expenses including EMIs are Rs 80,000 and your business requires Rs 1 lakh a month, you need to generate a monthly income of Rs 1.8 lakh. You may need to take a call on whether you are okay with eroding capital for a few years if the capital you have built is insufficient.Apart from regular cashflow required to manage operational costs, there could be major investments required in the form of capital. Further, capital infusion is not limited to the initial phase but every subsequent/new phase (like expansion). Entrepreneurs have to make sure that there is adequate capital available to avoid getting into a debt trap or losing out on potential opportunities. If you plan to fund these cash flow requirements from your own assets, it needs to get connected to your personal financial plan.
Debt forms a part of one’s financial plan especially while starting a new business. Typically, cashflows while starting a new venture are managed by borrowing funds. However, debt always has an impact on one’s monthly cashflow since it needs to be serviced regularly in the form of EMIs. The quantum of debt you take would depend on the cashflow analysis you have done. In the previous example, some expenses maybe required upfront and one may need to use debt instead of funding it from your investments. For example, apart from Rs 1 lakh of operating expenses per month, if you are servicing another Rs 50,000 of business loan EMI, then you need to plan for a monthly income of Rs 2.3 lakh per month. If the returns from your investment are unable to cover Rs 2.3 lakh, set a limit for your self on how much capital you can afford to erode.
Servicing debt can become difficult if cashflows are irregular. Thus if an entrepreneur has taken debt or borrowed funds and is regularly paying EMIs, he needs to create a contingency fund which can be in the form of a separate liquid fund or bank deposit. The corpus in the emergency fund can be equivalent to three to four months of monthly expenses and should be touched only during emergencies. If the loan amount is too high, it is advisable to take a risk cover which is equivalent to the outstanding loan amount in order to cover the liability in case of an unfortunate event.
The first place you can go to for borrowing is family and friends as this is unlikely to come with an interest component. However, if there is an issue with repayment, it could impact one’s personal relationships. Banks and NBFCs are options but may not give you loans in the initial stages of your business. So, it is advisable to take loans while you are still working. Mortgage loans are a good option as the interest rate is lower; so is loan against securities like shares. Personal loans, however, can prove costly and should be avoided. If cashflows are not very certain, it maybe a good idea to get equity funding for your business from angel investors or venture capital funds.
Managing investments is crucial. Let’s assume you had a financial portfolio of Rs 1.8 crore, giving a weighted average return of 12 per cent, or Rs 21.6 lakh a year. The portfolio is spread across bank fixed deposits (40 per cent), equity mutual funds (40 per cent) and equity shares (20 per cent). You will need to generate Rs 2.3 lakh a month (as mentioned earlier). As such, there would be a yearly shortfall of Rs 6 lakh which would result in an erosion of Rs 30 lakh in a five-year period.
This portfolio will need to be rejigged to ensure sufficient liquidity and generate returns high enough to replenish the fixed income portion. For this, part of the amount in fixed deposits can be put into liquid funds with a systematic withdrawal option. Periodically, gains from equity shares/equity MFs can be used to replenish the fixed income.
Illiquid assets like real estate or concentrated equity like Esops should be liquidated.
On starting a new venture you will be losing out on the health cover from the company that you had been working for; so it is advisable to have a family health cover. One could go in for a family floater health insurance policy of Rs 10 lakh or more. Sufficient life cover through a simple term plan is necessary to cover your loans. If your spouse is working and you are able to get cover by virtue of her company coverage, then this requirement would be addressed.
Source : http://goo.gl/pi1xeW
Ashwini Kumar Sharma | MON, JUN 15 2015. 01 26 AM IST | Live Mint
Use and possession of the secured assets differs depending upon the type of loan
Loans have become an integral part of our lives. Most people either service a home loan, a car loan, or a personal loan, or a combination of these. According to the Reserve Bank of India (RBI), as on 17 April 2015, total outstanding loans to individuals by banks was to the tune of Rs.11.77 trillion. These loans include those taken for consumer durables, housing, auto, education, credit card outstanding, advance against fixed deposits, shares and bonds. Most of these are secured loans (given against an asset). However, use and possession of the secured assets differs depending upon the type of loan.
This is the oldest form of a loan. Under this, the lender takes any asset as security in her custody or possession when giving the loan to the borrower. In case of default by the borrower, she has the right to sell the asset under her possession to recover the outstanding dues (principal along with interest). Common examples of loans by pledging assets in current times are gold loans and loans against securities such as shares, mutual funds or bonds. Typically, banks provide loans up to 50% of the value of approved securities.
Under this method, the lender provides a loan against movable assets. For instance, a vehicle loan (for a car, two-wheeler or any other vehicle). When you borrow from a bank to buy a car, the car gets hypothecated to the bank. The vehicle that is being hypothecated to the bank will remain in the possession and use of the borrower, but in case of default, the lender has the right to seize the vehicle and sell it to recover the unpaid loan amount. The total outstanding vehicle loan to individuals, as on 17 April, was Rs.1.26 trillion, according to RBI.
Another example of hypothecation loan is loan against goods or inventory (stock) and debtors. The borrower hypothecates the stock that she has to the lender and borrows a certain percentage of its value. The borrower has the right to trade the stock, but needs to maintain the minimum agreed value of stock. If the lender finds that the value of stock is less than the agreed value, it has the right to take the stock as pledge till the borrower pays the outstanding dues.
This is an agreement in which the lender provides a loan against immovable assets. A common example is a home loan. Of the total loan to individuals by banks, about 55% (Rs.6.42 trillion) is home loans. Just like hypothecation loan, here, too, the asset that is mortgaged to the lender remains in the possession and use of the borrower. But in case of a default or non-payment of estimated monthly instalment, the lender, say, a bank, can seize the property. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi Act), 2002, allows it to do so. If a borrower fails to repay her home loan, the bank can auction the property to recover the outstanding amount.
Source : http://goo.gl/ltYJri
RAJIV RAJ | JUN 17, 2015, 05.25 PM | BusinessInsider.in
Property purchase is a stressful affair, and for any salaried person it can be a life-altering decision. But most people are unaware of the fact that a property purchase is the best way to improve their CIBIL score. A mortgage has the biggest impact on one’s CIBIL score as it’s the largest piece of debt that one carries. Although your CIBIL score may drop a few notches when you apply for a home loan intially, it will go up over time as you make timely mortgage repayments. Let us take a close look at how your mortgage impacts your CIBIL score.
A mortgage indicates you are credit responsible
Mortgage has huge significance on your CIBIL score as it indicates that you have been responsible with your financial dealings so far. And if you maintain a good CIBIL score of 750 and above, your bank considers you loanworthy in the very first place itself.
A mortgage is good debt
A mortgage is also considered as good debt because it is tied to a physical asset (your home). This is opposite to credit card debt or a personal loan that is unsecured and does not have any asset backing in a physical form.
Your mortgage impacts your credit mix positively
Around 10% of your CIBIL score is on account of the credit mix you have. The credit mix refers to the types of credit you have availed of. If you have a mortgage along with some other unsecured credit, it is indicative of the fact that you have maintained a good credit mix. This in turn, impacts your CIBIL score positively.
Your CIBIL score increases over time on account of your mortgage
You have obviously opted to take up a home loan because you have the confidence that you will be able to make timely repayments on the same. When you make repayments on time over a prolonged period, your CIBIL score goes up gradually. This is because it exudes your dedication towards timely repayments. So, service your home loan well to give a boost to your CIBIL score.
You do not become credit hungry
If you are a salaried individual, repaying your home loan is going to eat into a substantial part of your salary. As a result, you may not apply for other forms of debt ( such as too many credit cards or other unsecured loans). This will not just keep your CIBIL score intact, rather you will not be viewed as credit hungry individual.
The negative impact that a mortgage may have
Just as it’s good to be positive about life, sometimes life can dish out nasty surprises as well. If things go awry and you skip a repayment or two on your mortgage schedule, it can bring down your CIBIL score drastically. As we mentioned earlier, a mortgage has the largest bearing on your CIBIL score. Therefore, the negative impact can be just as heavy as the positive impact of timely repayments. So to avoid landing in such a situation, it’s advisable to maintain an emergency fund at all times. And ensure that the amount saved in this fund is sufficient to meet your regular expenses (including your mortgage) for at least the next three months.
Therefore, ensure that you repay your mortgage on time and enjoy the benefits of a high CIBIL score throughout your loan tenure.
Source : http://goo.gl/1d0h4t