Collateral Substitutes for SMEs

There is a consensus on development of small and medium enterprises (SMEs) among policy makers and very often policy makers and financial institutions (FI) assure of all out support to SMEs, particularly about providing collateral-free loan. The first generation entrepreneurs, especially the new entrants to the financial market in our country, lack collateral, which is a major constraint in the starting and expansion of business. The FIs have many well-designed and well-printed brochures offering lucrative collateral-free loan but in practice there is no facility available to really deserving entrepreneurs. FIs very politely ask for collaterals and in case of female entrepreneurs, additionally ask for personal guarantee from father or husband.

Collateral issues attract the interest of common people and economists. Lack of collateral is a major constraint for small and micro-enterprises, and especially new entrants to the financial market. It is also a constraint for banks to the extent that it prevents the financing of small scale investments. Bankers reportedly use collateral to screen potential borrowers.

Collateral may be defined as property that secures a loan or other debt, so that the property may be seized by the lender, if the borrower fails to make proper payments against loan. Lenders demand collateral for a secured loan, they are seeking to minimize the risks of extending credit. There are some well-accepted collateral -- real estate including deeds, mortgages, leases, and other rights in real estate, inventory, account receivable from government entity and some reputed corporation, plant and machinery and security and bonds. There are some more collaterals like forward dated cheque, hypothecation (warehouse with valuable and marketable products), and trust receipts etc.

Collateral is an asset pledged to a lender, until the borrower pays back the debt. In case of default the lender has the right to seize the collateral and sell it. Collateral serves to protect the lender against risk. In principle, there is a close link between loan size and the extent and quality of collateralization, The larger a loan, the more the bank will be inclined to require a form of collateral that retains its value over time and that can be easily sold, taking into account the respective transaction costs involved.

Creditworthiness

In business, the lender is relying upon the creditworthiness and reputation of the borrower to repay the obligation. They virtually rely on security of investment through collateral. An alternate is unsecured loan for a promise to pay a debt. A mere promise does not serve the creditors' interest or right in any specific property unlike a secured loan. Some of the consumers' loan like credit card and small purchase for consumers are examples of unsecured loan. Sometime, the bank managers use to extend short-term loans to credit-worthy borrowers with a very high margin to meet their short-term financing needs.

Page 1234

Our Achievements

• Winner of appreciation award for promoting SMEs in India.
• 1st ever Indian magazine to penetrate tier II, III cities & the rural belt.
• Industry Partnerships include CII, FICCI, ASSOCHAM, PHDCC, AIMA, ITPO, SME Network, Federation of Indian Micro Small Enterprises (FISME)
• Official Magazine Partners for several national & international MSME events.

The Last Word

More Learned than Educated, You were!

I was speechless. Rather hesitatingly I asked him, “So, what have you decided, Sominder ?” His reply was curt and candid, “I have told the doctors that I don’t want to live life as dumb. Only...

Contribute

You can also write for SME WORLD

We are looking for writers and experts to contribute original stories and articles. Send an email to smeworld@gmail.com with your story idea and lets get talking.