Small businesses can find it difficult to get access to funding. Gold loans, however, can provide small businesses the much-needed funds to grow.
Unlike large corporations, lending institutions like banks and NBFCs typically tend to hesitate when it comes to offering loans or other credit facilities to MSMEs. This puts such businesses in a very tough spot.
Over the years, lack of funds has consistently been one of the major roadblocks that most micro, small, and medium-sized enterprises (MSMEs) have faced. Due to this unfortunate situation, small businesses find it extremely tough to grow.
However, the situation is not as bleak as it may seem at first glance. Small businesses on the lookout for some much-needed funds can always turn to gold loans as a means to finance their growth. Compared to traditional loan options, gold loans offer a plethora of different advantages that make them well-suited for MSMEs.
Wondering what is a gold loan and how it can help small businesses during crunch situations? Here’s a detailed overview.
What is a Gold Loan?
A gold loan is a secured credit facility where a financial institution offers a loan against physical gold. One of the many advantages of such a loan is that you can pledge almost any form of physical gold, be it coins, ornaments, or even bars as collateral.
Once you repay the entire amount that you borrowed along with interest, the financial institution will give the pledged gold back to you. However, if you fail to repay the loan on time, the lending institution may choose to sell the pledged gold to recover the loan.
How Do Gold Loans Help Small Businesses?
Small businesses often require a steady stream of cash to meet their day-to-day expenses. Without enough cash to run their operations, the entire business may even come to a standstill. Here’s where gold loans come into the picture. Here’s a glimpse of some of the different ways through which gold loans can be of major assistance to MSMEs.
Getting a Gold Loan is Relatively Simple and Quick
Unlike other credit facilities, the application process and documentation required to avail of a gold loan are very relaxed. One of the reasons for this has to do with the secured nature of the loan. Since you’re essentially pledging gold to get the loan, financial institutions don’t conduct extensive background checks or require complex documentation procedures.
This allows small businesses to quickly borrow money and continue with their operations without any major interruptions to their workflow. Depending on the financial institution, getting a gold loan can take anywhere from 24 to 48 hours. This is comparatively faster than traditional loan facilities, where you may have to wait for days or even weeks to get access to funds.
Gold Loans Don’t Require an Extensive Credit History or Good Credit Scores
One of the many metrics that financial institutions check before granting a loan is the borrower’s credit history and score. Higher the credit score, the greater the chances of getting a loan.
But what about small businesses with little to no credit history or low credit scores? With gold loans, businesses are not required to possess extensive credit history or great credit scores. Pledging of physical gold is more than enough for financial institutions to grant a loan. Thanks to this, even new businesses can freely get a loan without worrying about getting rejected.
Gold Loan Interest Rates Tend to be Very Attractive
Many financial institutions offer unsecured business loans. However, the primary drawback with such credit facilities is that they usually come with very high rates of interest, which can end up stressing the finances of small businesses.
Thankfully, with gold loans, it is not the case. Since it is a secured credit facility, a major part of the financial institutions’ risk gets covered. This allows lending institutions to offer loans at interest rates that are far lower than unsecured credit facilities, significantly lowering the financial impact on the borrowers.
Small Businesses can Get High-value Loans Easily
Earlier, the loan-to-value (LTV) ratio on gold loans was pegged at just 75%. This meant that borrowers could only get loans up to 75% of the value of the pledged gold. However, from the year 2020 onwards, the Reserve Bank of India (RBI) raised the gold loan LTV to 90%, enabling borrowers to avail of loans to the tune of 90% of the pledged gold’s value. This can be highly advantageous for small business owners as it allows them to maximize the amount of loan that they can avail using their gold.
Gold Loans Don’t Come with Any Restrictions
This is another major reason why small businesses should opt for a gold loan. Financial institutions typically impose certain fund usage restrictions when granting business loans. For instance, they may restrict the usage of the loan to just the purchase of plant and machinery or raw materials.
Such kind of restrictions may not bode well for MSMEs and tend to put them in a tight spot. Gold loans, however, don't feature any kind of such restrictions. The loan that businesses obtain by pledging gold can be used by them to pay off debt or salaries, purchase raw materials, or even pay rent. The freedom to use the loan as they see fit is something that can benefit small business owners immensely.
By leveraging the many advantages of gold loans like fast approvals and quick fund disbursals, among others, small businesses can continue to focus on what matters the most - growth, instead of having to scurry for funds. And since there are no fund use restrictions, businesses can put the loan to use as they see fit, giving them complete freedom.
Courtesy - DevDiscourse
Link - https://www.devdiscourse.com/article/business/2366857-sensex-rallies-nearly-900-points-nifty-jumps-over-272-points-on-firm-global-trends