25/02/2021
How Bank loan is a better option to grow your business faster?
We all know that Business means Capital or Investment. In India, the majority are doing jobs, with a willingness to do the business of their own, because of the shortage of capital. Very few of them get succeeded in their life and able to shift from job to business.
The majority of people think that to start a business they require a lot of money without knowing that they can always start their business with little a capital also and banks are there to support them for their extra capital requirement. If they have faith and believe in the idea or having experience in a particular area to get succeed in the business of that category, the total capital they require is in the range of 25% to 30% only and the rest 70% to 75% funding will be managed by banks at a very lower rate of interest.
Bank loans are available in different forms for different purposes –
1) Term Loan – it is supported for capital investment of a business which is required at the time of new business setup or for expansion of existing business setup. Any kind of capital investment will be supported by the bank in form of a Term Loan up to the extent of 75% and the balance of 25% only need to be arranged by the promoter to set up the business.
2) Working Capital – once the business gets set up after capital investment, the bank also support the business in terms of their working capital requirement for day to day operations. With this working capital requirement, day to day expenses like creditors bills, employee salary, administrative expenses and any other form of operating expenses will be managed. The bank again extends their support up to 75% funding of total working capital requirement of a business and the rest only the 25% of working capital contribution need to be managed by the promoter to run the business smoothly.
The above two types of loans are very popular and almost 99% of business houses had availed this loan to set up and run their business and succeeded in their life.
Further, any success of a business is determined by its return on capital invested. So in the above scenario, availing a loan of up to 75% from banks will fetch you almost 4 times higher return on capital invested which is up to 25% only of promoter contribution.
For Example – Say a business having a turnover of Rs. 1,00,00,000 and profit margin is 10%, i.e., PAT is 10,00,000 on a capital investment of Rs. 30,00,000 and working capital of Rs. 20,00,000.
In this example the total investment required is Rs. 30,00,000 + Rs. 20,00,000 = Rs. 50,00,000 and PAT is Rs. 10,00,000. So in this case if the total investment will be arranged by the promoter then its return on capital is (10/50)*100 = 20%.
Whereas, in case there is a bank loan of 75% and promoter contribution of 25% then bank funding will be Rs. 37,50,000 and Promoter contribution will be Rs. 12,50,000 and on PAT of Rs. 10,00,000 the return on capital will be (10/12.5)*100 = 80%
In the above example, it is clearly shown that by availing of loan from banks, the return on capital investment gets exceeded from 20% to 80% which leads to higher business growth. In this scenario, the business is growing 4 times faster than in the case where the entire investment can be borne by the promoter itself. So the loan is better in case of business to succeed faster.
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