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An Entrepreneur’s guide to Bank Loans in Nepal

This article is the first in the 3 step bank loan guide for entrepreneurs in Nepal: by the end of the series, you will have the knowledge you need to proceed towards getting a loan and using it to start or grow your business. For the purposes of this series of articles, we will use 7 Class ‘A’ banks in Nepal as case studies, on the basis of which we will discuss our plan of action.

Nepal has plenty of banks offering similar loan policies--it can sometimes be difficult to decide which of these is perfect for your business. Today, we will look at 7 questions you should ask yourself and your business partners that will give you a general direction of what type of loan you should be taking. The loan options that are given here as examples are simply some of the many policies available, therefore, if you feel like the particular policy doesn’t match your needs, you can always find a similar option somewhere else.

Before we start with the questions, we will first explain the Interest Rate format used in this article: for example (BR + 0.5 to 5.00%). BR, here, means the Base Rate of the loans: the starting or minimum amount of interest rate of the bank. Each bank has a different Base Rate, and Nepal Rastra Bank stipulates that each bank must release base rates on a 3-month basis and can thus only change it once every three months. Base Rates can be found on the bank websites or through a phone call to the bank. It is important to consider the base rates as some banks have rates of over 10% while others may have much lower rates. The +0.5 to 5.00% is an example of the range of premium that is added to the base rate on every loan and is different for different loan programs. Thus, the (BR + 0.5 to 5.00%) represents the total interest rate of the loan program.



1.What is the size of your business?

One way to measure the size of your business is the amount of capital that you need to survive: if you need more capital, it means that you have a larger business. According to the size of your business then, you will get an idea of the amount of money you need to successfully run or grow your business. The amount of money you need affects the loan program you should apply for. Different banks offer different maximum and minimum loan amounts with each range having different interest rates. The way to proceed then is to find the perfect range of loans and then, look for the best deal on this range.
For example, Himalayan Bank Limited has a “Small Personal Business Loan” as well as a “Small and Medium Enterprise Loan” in which the Small Personal Business Loan has a maximum of NRS. 50 lakhs (5 Million) that can be taken as a term loan, while the SME Loan allows for a maximum of 6 crores to be taken out. Both loans can have different interest rates, and therefore it is important to know what range fits your needs the best.

2.What type of business are you starting/ growing?

The type of business you are starting will impact the loan program you opt into; businesses can be broadly defined as service businesses and goods based business. For goods-based business, one way to further divide is by the types of goods that you are selling. This is useful to know because depending on the type of business, you could find options that are particular to you and get a differentiated program (with lower interest rates).
If we take the example of agriculture-based businesses in Nepal, we can see plenty of differentiated loan options that have much lower rates. Bank of Kathmandu’s Agriculture Business Loan may be a great option for agriculture-based businesses as you can get loans of up to NRS 1 crore (for multiple business owners) that has a lower interest rate (BR + minimum 0.5%) instead of the usual Small Enterprise Loan that has a minimum interest rate of (BR + 1%). Therefore, it is important to distinguish what type of business you’re requesting a loan for, and possibly find a specific loan program.

3.Are you exporting/ importing goods?

The important question you have to ask is whether you are selling goods to customers within Nepal, or outside Nepal.
If you are exporting goods, you might be able to get a loan for Export Finance: Sunrise Bank offers the Export Finance Loan for financing the needs of exporters (including shipment loans, document negotiation etc).
They offer this loan at (BR + up to 6%) for both corporate and non-corporate applicants. Similarly, Nabil bank also offers its own loan scheme for Exporters and Importers, focusing on financing and facilitating overseas trade relationships. The loan is offered at a rate of (BR + 3.25-5.50%) for Multinationals and Prime (high-quality) applicants while for others the rate is much higher (BR + 4.75 - 6.50%).
Therefore, knowing which banks have customized Import/export policies and which one best suits your needs can be a huge advantage.

4.What is your selling platform?

With a lot of businesses today using online platforms to sell their goods/ services, there are more options to receive funding for business ideas.
While loans are still an option, a lot of businesses today (especially tech-based businesses) have a potential for investment from Venture Capitalists, Impact Funds or Angel Investors. In Nepal today, there is a lot of potentials for high-quality start-ups to get funded through individual investors or investment groups, located heavily in the cities.
If you have a start-up that requires funding from investors, be sure to reach out to us as we have the platform to connect you to these investors.

5.What is your and your fellow business owners’ background?

The background of the business owners is a key point of consideration when it comes to the loan program that you should accept. By background here, we are referring to identity: your place of origin, place of residence, gender, economic background, age, and experience. Each of these identity metrics can potentially add value to your loan application.
For example, if your place of residence is in a Deprived Sector (as determined by Nepal Rastra Bank), or even if your work is aimed at these areas, referred to as deprived yet emerging sectors, there will be advantages to you in your loan application process. This is because 5% of every Commercial Bank’s lending has to be allocated towards Development Credit Unit (DCU), as made mandatory by NRB. Besides the geographical area of work, another key identity metric is gender: because of the existing societal discrimination that women face daily, a lot of Development Credit Unit (the 5%) goes to loans for female business people. The Mahila Udhyamshil Karja is an example of this--enacted by Bank of Kathmandu, this program allows female citizens (aged 18 to 60) to borrow loans of up to 4 lakhs, repaid on a monthly or quarterly basis. The interest rate for this loan is (BR + 0.50 to 6.00 %). The DCU policy has been enacted by the national government for the empowerment of socially discriminated individuals, and therefore individuals with the relevant backgrounds should make full use of them.

6.How is your business doing/ how do you expect it to do in the near future?

The repayment time/ method is a factor that a lot of loan applicants in Nepal fail to consider. While your business should already be making some profits (or on the way there), loan applicants should consider when they will be making enough profit to pay back the loans. Here, we need to consider the difference between the two main types of loans: Term Loans and Overdraft.
Term Loans refer to traditional forms of loans, used to finance mostly fixed assets and these loans have a fixed return period, with repayments normally happening on a quarterly or a monthly basis. There are also short-term loans with shorter repayment period (6 months-1 year). These loans are better for businesses with a definite stream of revenue and businesses that are already making profits because the term loans can be used to scale up or finance long-term costs.
Overdraft, however, is better for low-range loans, mostly used for funding everyday expenses. Overdraft loans are taken by individuals with existing accounts in banks from which they can withdraw money. How Overdraft works are that even if you run out of money in your account, you can continue withdrawing money which you will have to pay back at a certain interest rate.
Nepal Investment Bank, for example, provides Overdraft Loans at (BR + 1 to 6.75&) interest rate while it provides Long term Loans at (BR + 1.5 to 6.75%) interest rates. Similarly, it also provides Working Capital Loans (to finance the working capital requirements of businesspeople) at a lower interest rate of (BR + 0.75 to 6 %). Therefore, depending on the current and expected profits, a loan applicant should decide the type of loan and the repayment time period they are most comfortable with.



7. Most importantly, remember to ask yourself why are you taking a loan. This might be much more of a personal question, but reflecting on your personal and business goals could prevent you from not prematurely growing your business or maybe even starting a bigger business.
  
     

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