E-Commerce Loans in India
The e-commerce market has grown at a phenomenal rate over the last few years with several millions of customers moving to online marketplaces in order to get good deals on a wide range of products and services. Banks have therefore taken notice of the massive growth prospect that still prevails and have begun to provide loans to e-commerce companies to help them grow their business operations and increase market penetration. Several top banks have dedicated loan services specifically to e-commerce companies – these loans cater to small, medium and big market players. With the market becoming hugely competitive with time, loans have come as a catalyst to several e-commerce companies that are adding great value to the services they provide.
As mentioned earlier, several top banks have taken up the task of lending to e-commerce companies with the idea of helping in their growth. Apart from banks, venture capitalists are also investing significantly in several e-commerce companies in India, mostly because of the market potential. Venture capitalists extending loans to e-commerce companies aren’t based just in India – several foreign companies have also shown keen interest in the Indian e-commerce sector.
Features of E-commerce Loans
These loans are extended to e-sellers in India. Many banks have a separate type of loan ear-marked for e-sellers. The key features of e-commerce loans are –
- Type of unsecured loan, no collateral requirement
- Loan value extended could range between Rs. 1 Lakh – Rs. 1 Crore
- Loan tenure can range between 90 – 270 days
- Interest payment 1.5% onwards
- Flexible repayment mode – monthly, bi-monthly repayment schedule available
- Loan sanction is capped at ‘x’ times of sales revenue per month
Different Uses of an E-commerce Loan
There are several scenarios where an ecommerce loan could be beneficial for your business. They are as follows:
- Expanding Your Business
When your business continues to grow it can help ensure that your profits don’t shrink and your finances are in place. By getting a loan, you can cover the expenses of expanding your business without exhausting your operational funds and continue to grow your business.
- Purchasing New Inventory For Your Business
When running a business you need to keep up with the demand and provide better options to your customers. Such expenses are even more difficult when your business demands for seasonal inventory. But with a loan to offset inventory costs, you can stay ahead of trends and customer demand without hurting your cash flow.
- Hiring New Employees For Better Management
If you need a helping hand for your business you can hire employees to get the work done. The loan amount can cover the monthly salary so that you do not have to compromise on hiring qualified staff for your e-commerce business.
- Redesigning Your Online Website
Setting up your company’s online website is a smart way to get your company out in the market. With good financing, you can set a new website or upgrade an existing one to make the interface convenient and appealing to your customers.
- Supplementing Your Marketing Budget
One should never overlook the importance of marketing, no matter how good your products or services are. With a business loan, you can finance your marketing budget on various platforms and spread the word which will ultimately increase sales.
- Covering Day-To-Day Business Operational Expenses
Cash flow is always a challenge for a small business when you have unsold inventory that needs to be moved to bring in new products. By maintaining a smooth money flow through your business, you can continue to carry out business operations and bring in new customers to drive revenue while making up for any losses.
E-commerce Loan Eligibility Criteria
Earlier, the norms for availing e-commerce loans from banks / NBFCs or any other financial institutions were stringent. It has been relaxed considerably now. The loans are now extended to start-ups which have not filed their first income tax return (ITR). The growing trend of venture capitalists funding such start-ups has awakened the need for banks to lend to ensure that they do not lose out this fast-growing market. The key eligibility criteria for availing loan are –
To be able to avail a loan with ease, you need to fulfil the following business loan eligibility criteria.
- You must be a citizen of India
- You must be a self-employed individual.
- Self-employed individuals between 26 – 66 years are eligible and can apply for a Loan.
- You must have a business vintage of at least 3 years.
- The e-seller should have registered the business and should have been in operation for atleast 6 months
- Business should have an established presence in atleast one of the popular e-commerce platforms – Amazon, Flipkart, Snapdeal, Shopclues, Alibaba, Paytm etc.,
- A stipulated volume and revenue per month should be achieved, this would vary from one lender to another
- A decent credit score which will enable the borrower to negotiate favorable terms for the ecommerce loan
Documents Required for E-commerce Business Loan
The following are the list of documents required for a loan for business:
- Identity Proof – PAN Card, Aadhaar Card
- Residential Address Proof – Rent Agreement, Driving License, Voter ID, Ration Card, Passport
- Last 6 months Current Account Bank Statement
- GST Registration Certificate
- Shops and Establishment Certificate
How to select the right e-commerce loan?
For an e-commerce company to achieve success, the right e-commerce loan must be chosen. There are many e-sellers who need to have been unable to scale-up their businesses due to lack of necessary funds and appropriate vision. These are some key considerations while choosing the right e-commerce loan.
Calculate all costs associated with sale on internet platforms
Selling a product online needs proper market research to assess the competitors pricing of similar products. While pricing the own products, one must keep in mind all the costs involved in moving to the online platform. There are registration costs which is a one-time cost and recurring monthly fee payable. There may be ancillary charges such as transaction charges, bandwidth, server storage, apps and plug-ins etc., All these costs must be considered, and an assessment must be made to ascertain the loan that needs to be borrowed.
Low interest rate and flexible repayment schedule
Like all other loans, e-commerce loans also have the interest rate. This is one key component that needs to be considered. A comparison must be made across various lenders and the one with the most conducive terms should be chosen. Typically, these loans are taken for short term.
Fast and easy disbursement of loan
These loans are designed with minimal processing requirement. They require minimum documentation and are processed with low charges compared to other loans. Typically, the loan value would be ‘x’ times the monthly revenue of the business. There is a need to establish stability of income while borrowing funds, especially if the loan is extended as an unsecured loan (without collateral). In other cases, the inventory is provided as collateral against the e-commerce loan.
Underlying pledge for e-commerce loans
If the loan is extended as an unsecured loan by a bank or NBFC, or any other financial institutions, the borrower is required to pay it back along with interest rate. In other cases, when the funding comes from venture capitalists, there may be equity dilution. The borrower must forego a part of ownership in the business.
Lenders of E-commerce Loans
While most banks grant these types of loans under their personal loan product, the bigger players like SBI have a separate product called the e-Smart SME E-commerce Loan. The loan is specifically structured to benefits the Small and Medium Enterprises (SME). This product was launched in collaboration with Snapdeal, one of India’s largest retail e-commerce dealer. Following the launch of e-commerce loans by SBI, there are other banks such as Canara Bank, Syndicate Bank, Bank of Baroda and Punjab National Bank which have launched their own e-commerce loans with terms especially conducive to e-selling enterprises of small and medium size. However, not all these banks extend e-commerce loans without collaterals. When there is a without collaterals. The interest rate could vary from one lender to another.
Let us look at some options available to e-commerce companies – those that mostly small and medium enterprises – in India.
The SBI e-Smart SME E-Commerce Loan
SBI which is India’s largest bank, has launched the e-Smart SMS e-commerce loan that seeks to fund the growth of e-commerce companies in India. The loan is mostly structured to help Small and Medium Enterprises (SMEs) in their search to beat market standards and become more competitive in the fast-growing market. SBI has launched this initiative in partnership with Snapdeal, one of India’s largest e-commerce companies.
Here are some salient features of the SBI e-Smart e-commerce loan:
- Under the MUDRA Loan scheme, no collateral is required for amounts under Rs.10 Lakh.
- Processing of the loan is speedy and does not involve procedural delays.
- The processing fee for the loan is 0.3999%.
- A concession of 0.25% is given to women entrepreneurs.
The loan, which specifically targets the medium segment sector, has been successful ever since its launch in January 2016. Several SME e-commerce companies have benefited from this initiative by SBI.
Loans by Public Sector Banks
Besides the initiative by SBI in partnership with Snapdeal, several Public Sector banks in India also offer loans to e-commerce companies in India. Some notable banks include Canara Bank, Syndicate Bank, Bank of Baroda and Punjab National Bank. These banks usually provide loans on the basis of collaterals and interest rates can vary.
Loans by NBFC
Several NBFCs (Non-Banking financial corporations) are also engaged in extending e-commerce loans to e-sellers who trade their goods or services on popular online portals such as Amazon, Snapdeal, Flipkart, Shopclues etc. Some of the NBFCs that offer e-commerce loans under their product line are Tata Capital, Reliance Capital Limited, Bajaj Finserv, DHFL, Indiabulls, Fullerton, Cholamandalam Finance etc. There are other institutions which specialize in extending e-commerce loans such as Capital Float, BankFin, Gromor Finance etc.
Apart from banks, there are many financial institutions and venture capitalists who prefer to fund the e-commerce segment. They see tremendous value and growth in this space. Venture capitalists are on the look-out for e-commerce companies which have not matured in the market. They look at funding opportunities which are in nascent stages. By providing them funding at this stage, venture capitalists help them increase the depth of their operations. The investment in such businesses has become apparent, there are known venture capitalists whose name being associated with any e-commerce company could potentially increase the brand value of the company. This could potentially result in increased revenue. The ideology of investing in e-commerce companies at nascent stages is to enable them to increase their market share substantially and gain profits. Several banks have also invested their funds in e-commerce companies in the hope for higher returns on such investment. These investments reflect in the Balance Sheet of the bank on the assets side.
Loans by venture Capitalists
Venture capitalist companies have also cashed in on the growing e-commerce market. These companies invest in e-commerce companies that are growing, and help them increase the depth of their operations. As a matter of fact, investments by venture capitalists in e-commerce companies and other start-ups has become a visible trend these days with several companies directing investment with the hope of seeing an enhanced market share and subsequent profits.
As such, investments by venture capitalist firms has seen success over the past years with several firms more than doubling their initial investment. In cases, banks themselves invest in e-commerce companies if scope for growth is large.
Capital Float is a relatively lesser known enterprise that delivers working capital loans to SME companies, particularly e-commerce companies. The enterprise offers flexible loan options to start-ups and helps them commence operations by providing them with working capital.
With many initiatives taken by banks, venture capitalist firms and other financial institutions in providing loans to e-commerce companies, the prospects of growth have certainly risen over time.