How Can Gold Loans Help Small Business Owners?
1. Introduction
- Financial challenges faced by small business owners
Operating a small business can be extremely difficult. Not only from an operational lens, but also when it comes to operating it without sufficient capital. Be it opening or operating, businesses can be extremely capital-intensive. Small business owners often find it difficult to source raw materials, fund marketing expenses, and even spend on essentials like rent and other operational activities due to a lack of sufficient capital.
- Growing relevance of gold loans for MSMEs
Gold loans are an extremely popular type of loan available in India. Of late, these loans are gaining traction among the business communities as well as aspiring entrepreneurs as a sustainable way to raise funds to fulfil the capital requirement in the business.
- Purpose of the article
The purpose of this article is to highlight how gold loans can be a sustainable way to avail much-needed funds to start or operate businesses in India.
2. Understanding Gold Loans
- What is a gold loan and how it works
Gold loans are a type of asset-backed form of lending, where the borrower gives possession of their gold to the lender as collateral. The gold serves as a safety net for the lender’s risk associated with lending to the borrower. Once the borrower repays the loan in full, including the principal, interest component, and any associated charges as stipulated in the loan contract, the loan is settled, and the lender gives back the possession of the gold to the borrower.
- Who can apply for a gold loan?
Any individual above 18 years of age, with gold fit for collateralising, can avail a gold loan. As compared to some traditional lending products, these are relatively easier to avail, since they are backed by the borrower’s gold, which helps mitigate the lender’s risk.
- Typical features: tenure, interest rates, repayment options
The features of gold loans are not very different from traditional asset-backed loans. The tenure is agreed upon at the time of application; generally, it is 1 year in most cases; however, this can be modified at the lender’s and borrower’s discretion. Interest rates are on the lower side compared to personal loans. And repayment options are borrower-friendly friendly with multiple repayment options available. Lenders like indiagold offer extremely borrower-friendly features with their gold loan proposition.
3. Why Small Business Owners Choose Gold Loans
- Quick access to funds: Small business owners choose gold loans over other traditional forms of loans due to the fact that it is a sustainable way to access funds quickly without hassle. With trusted lending partners like indiagold, gold loans can be availed in a matter of minutes!
- Minimal documentation: Gold loans require minimal documentation. In most cases, the borrower requires their KY documents, address proof, and PAN card to avail a gold loan. However, it is advised to always check with the lender for applicable documents.
- No need for business financial history: Gold loans are asset-backed loans, which require no financial history of the applicant or their business. Your gold is sufficient for availing a gold loan!
4. Key Benefits of Gold Loans for Small Business Owners
4.1 Fast Approval and Disbursal
- Short processing time compared to business loans: Business loans are extremely time-consuming due to a complex and lengthy assessment process by the lenders, which is not the case wth the gold loans. Hence, compared to traditional business loans, one can avail funds much quickly with gold loans!
- Useful for urgent working capital needs: Since gold loans processing and disbursal are extremely quick, it, in many cases, serves the purpose in case the borrower requires urgent working capital.
4.2 Lower Gold Loan Interest Rates For Business Compared to Unsecured Loans
- Gold as collateral reduces lender risk: Gold is a precious metal with a good price history, price stability and a solid demand in the secondary market. This makes it a great financial asset. Such assets prove to be excellent collateral. Such collateral significantly reduces the lender’s risk.
- Comparison with personal and business loans: The interest rates applicable to gold loans are generally lower than traditional forms of lending, like personal loans or business loans, this is because the lender’s risk is minimised since a solid financial asset liek gold is kept as a collateral which can be liquidated by the lender to recover the dues in an event of a default by the borrower.
4.3 No Impact of Business Credit History
- Suitable for new or informal businesses: Gold loans are extremely suitable for informal businesses because these loans require no business proof, so if you’re operating a small business, then it can prove to be an extremely sustainable way to avail credit, since gold loans don’t require business or income proof.
4.4 High Loan Amount Based on Gold Value
- Loan-to-Value (LTV) ratio: With gold loans, the gold loan amount is directly proportional to the value of the gold. As per the guidelines put forth by the Reserve Bank of India (RBI), a lender can lend up to 75% LTV. i.e. if the value of the gold collateral is INR 100,000, then the maximum loan amount will be INR 75,000. The final LTV is dependent on the lender’s policy.
- Using idle gold assets productively: If you have an idle gold asset, then it can be productively used to avail credit. Gold loans are a great way to utilise under-utilised gold assets.
5. Common Business Uses of Gold Loans
- Managing working capital: One of the most common uses of gold loans is to fund the working capital requirement of a business. Gold loans can provide the much-needed capital in a matter of minutes, which is crucial from a working capital point of view.
- Purchasing inventory or raw materials: Gold loans can provide a capital injection to purchase inventory or raw materials. This can help with the smooth functioning of the business without having to worry about arranging funds after realising the pending invoices.
- Equipment or machinery expenses: Gold loans can also help fund equipment or machinery expenses in a business. Since these expenses are typically expensive, a low-cost loan like a gold loan can go a long way!
6. Risks and Limitations of Gold Loans
- Risk of gold auction in case of default: Gold serves as collateral in gold loans. I.e. it serves as a hedge against the risk undertaken by the lender by lending to the borrower. In case of a default by the borrower, the lender reserves the right to liquidate the gold to recover the dues.
- Shorter loan tenures: Gold loans compared to traditional loans like business loans often come with a shorter tenure, hence the borrower should keep in mind that they’re able to arrange the repayment amount well within the loan tenure.
7. Tips to Use Gold Loans Effectively for Business Growth
- Borrow only what is needed: It is essential to borrow responsibly. Over-borrowing can put pressure at the time of repayment, and can lead to default and eventually loss of assets.
- Choose the right repayment structure: Choosing the right repayment structure can help pay off the loan efficiently without having to go through hardships. A repayment plan which aligns with your finances will put your finances at ease!
- Repay on time to avoid penalties: Timely repayment is essential with any form of loan. Repaying on time will help avoid penalties and later repayment fees, which can add up and increase the cost of borrowing.
