The SME CEO Peer Group


SME Financing: The Salient Points A CEO Must Know

Finance for an enterprise is synonymous with Blood in the human body. If an enterprise wants to survive and grow, adequate finance is a must. Again, arranging finance for a new venture is not at all easy. However, if an enterprise proceeds in a systematic manner, the possibility of getting finance or loan from any Bank increases manifold. To that end, I would like to spell out the salient points, as under:

  • Purpose: Before approaching the Bank, one must be absolutely clear about the purpose of the loan. There should not be any ambiguity as regards the objective of applying for a loan.
  • Creditworthiness: The second and vital step for a prospective entrepreneur is to know his or her creditworthiness. If the past record of the person(s) is bad, the Bank will never consider the proposal. For this, verification of CIBIL Score comes in handy.
  • Eligibility Criteria: One needs to know the eligibility criteria for availing a particular loan and find out where he or she stands. This is a prerequisite for applying for a loan
  • Business Plan: Once the first three steps are through, this is the fourth step. In order to prepare a perfect business plan, an entrepreneur has to survey the environment of the area where the unit is proposed to be set up. This includes adequacy of various inputs like raw materials, skilled or unskilled labourers, power, water, etc. required for the project and demand of the products or services in and around the place. It is also important to know who the competitors are in that particular line of business. To be precise, a SWOT Analysis has to be done. Apart from that, one has to ascertain as regards licencing and regulatory requirements which inter alia include pollution control certification, the latest policy of the Government, etc. Once these aspects are properly taken care of, a project report has to be prepared detailing therein the cost of project, timeline of project implementation, projected Profit & Loss account and Balance Sheet for three years, Cash Flow and Fund Flow for three years, etc. (The requirement, however, varies with the size of the project.)
  • Margin: Whatever be the type of activity, the entrepreneur has to bring in his / her capital depending on the size and nature of the enterprise. In other words, it is the stake of the man behind the project. So before approaching any Bank, this aspect needs to be kept in mind.
  • Guarantor(s): Other than a few specific Government Schemes, the guarantor(s) is/are required to avail any loan. The guarantors have to be creditworthy and persons of repute. So this requirement has also to be remembered before moving ahead to avail any loan.
  • Collateral: The dictionary meaning of collateral is something pledged as security for repayment of a loan, to be forfeited in the event of a default. In case of a normal loan (other than schematic lending), Bank always asks for collateral. As such, it is essential to have some clear arrangements in place.

While the requirements may vary from Bank to Bank, these are the broad necessities to know before applying for a loan from the Bank.

Pulak Kumar Sinha is a retd. General Manager at State Bank of India. He is a Certified Associate of Indian Institute of Bankers and has a P.G. Diploma in Management from All India Management Association (AIMA). His specialised areas are Credit and General Banking. He was also a Chairperson of Reserve Bank of India Working Group on Evaluation of Feasibility of Aadhaar based Biometric Authentication as Additional factor of Authentication for card related transactions and other issues.


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