Business Loan: Secured or Unsecured?

Suppose your small business needs more cash than can be supplied through a line of credit or personal credit cards. In that case, it may be necessary to apply for a small business loan.

As with any form of financing, debt structure, interest rates and payment schedule will depend on the bank, lender's credit history, health of the business and vintage. Owing to these factors along with many others, many times you might not either be able to receive the desired loan amount unless it is secured or at a much higher interest rate. Taking these factors into consideration, before applying for business funding, it is suggested that you determine whether you will need to pursue a secured or unsecured loan.

Secured Loan: the most common and straightforward lending option because they are backed by an asset, either personal or business related. If the borrower defaults, the business lender assumes ownership of the property and may try to recoup their loss by selling it. The types of collateral that could be used to secure a loan: Unpaid Invoices, Inventory, Equipment, and Real Estate (Commercial and/or Personal).

As a small business owner, you may benefit from this option if you want to limit your personal risk in the investment or want lower interest rates and the ability to pay back the investment over a longer period.

Pros:
a) NBFCs and banks are willing to work with small businesses when their investment is assured

b) these allow you to pay back over time for large purchases that you don’t expect to pay off quickly

c) can have a longer payback period of up to 30 years.

d) less risk to lender owing to lower risk backed by a collateral

Cons:

a) limited by the fair value of the asset pledged as collateral

b) the lender has legal authorization to seize the asset if the agreed-upon payments are not made on time

Unsecured Loans: means that the borrower doesn’t have to provide collateral to qualify and receive financing.

Unsecured business loans may be viable for business owners with a strong personal credit score. However, this type of business financing represents more risk to the lender. If you borrow money and default on your payments, there is no asset to seize. Hence, unsecured loans typically come with stringent standards (such as credit score requirements) and higher interest rates. In addition, at times, banks may require a different security feature as an alternative to collateral – like a percentage of your credit card transactions or POS (Point of Sale) transactions.

As there is no collateral attached, the corrective actions that can be employed by the lender in case of a default --
a) Legal action

b) Employ collection agency

c) Sell debt to 3rd Party

Pros:
a) Due to absence of collateral, the disbursal process bypasses lengthy appraisal 

b) in case of bankruptcy of business, the loan has the potential to be forgiven

Cons:

a) more expensive as the risk to lender is higher

b) shorter repayment periods - up to 36 months in most cases

c) harder to obtain as the risk must be absorbed for non-repayment

Defaulting on unsecured business loans can mean financial ruin and damaged credit, so make sure you’re confident in your business before applying.

For new entrepreneurs, secured business loans may be the only available option. Unsecured credit can offer more flexibility, larger amounts, and faster access to cash for established business owners willing to pay higher interest rates. However, they may be held personally accountable if the business defaults.

Entrepreneurs may also want to consider partially secured loans, where the collateral is required but doesn’t have to cover the principal. Lenders assume less risk with these loans because they typically aren’t discharged by bankruptcy. Therefore, the pledged asset guarantees some return in the event of default. Banks may offer more attractive terms for partially secured loans than unsecured, such as lower interest rates and longer repayment time.

The Crypto Tumbleweed

Aman saw one of his neighbours reaping a lot of dividends from the financial market investments, while a few of his friends were bleeding in the stock market. He was confused and perplexed. He did what most of his other peers and the internet search guided him to: CRYPTOCURRENCY

As per him as well as the peer group, keeping money in banks was not safe, with a few reputed too going bust in the recent past, other instruments although stable, took too long to reap benefits (3-5 years). With the quick-fix generation looking at immediate benefits, it was indeed a big concern (pun intended).

After soaring to dizzying levels, cryptocurrencies have lost more than half of their value in the recent months. The recent collapses and the scatter in the crypto market has taken many by shock. Investors are experiencing the deep chill of the current crypto slump, almost half-a-decade after the market’s mainstay, Bitcoin, marked the first digital freeze by tumbling from its then peak. The recent fall has been sharp and spectacular, an overall market that was estimated to be worth more than $3 Trillion barely six months ago is now worth less than $1 Trillion. This “crypto crash” has reinforced the perception of critics that markets for the digital currency - used primarily as an investment vehicle as it is not widely accepted as payment for goods and services - are little more than global casinos operating with virtually no rules or accountability.

The emergence of the latest crypto boom had all the characteristics of being another example of the "Robinhood Economy". Bored white collar workers, confined to their homes due to the pandemic lockdowns but plentiful disposable income, turned to day trading as a way to pass the time. Cryptocurrencies also benefited from the surge in day trading. Bitcoin had an year-on-year growth of 1100% between 2020 and 2021. Even in the latest boom, another crypto, Ethereum saw a phenomenal growth of ~4100% in 2021.

The flood of money washing into the world of crypto did more than simply inflate the monetary value for the incumbent shareholders. It instead led to a surge of interest in, and funding for, the vast array of projects that aimed to capitalise on the underlying technology of cryptocurrencies. For a generation of new investors, the “decentralised finance” opportunities of the sector were appealing. Built on top of the “programmable money”, the “DeFi” [decentralised finance] sector was an attempt to expand cryptocurrency's anti-establishment ethos to cover the global economy. 

The crypto crisis has played out against the backdrop of wider market problems like rising inflation and higher borrowing costs that have stalked investors. Some market watchers play down the prospect of a crypto crash triggering serious problems elsewhere in the financial markets or the global economy but digital assets have been hit by some of the same economic issues that have affected the wider global economy and stock markets. Cryptocurrencies have been affected by concerns over rising inflation and the ensuing increases in interest rates by central banks, which has made risky assets less attractive to investors. This meant that as stock markets declined, so too did crypto assets. 

So, What's Next? The principle of “buy the dip” is based on an assumption price drops are temporary aberrations that correct themselves over time. Dip buyers hope to exploit dips by buying at a relative discount and reaping the rewards when prices rise again. Crypto markets are volatile, so buying cryptocurrencies at any price – let alone a dip that might become a long-term trend – is risky. While prices could return to previous levels, they could also fall even further, leaving your investment underwater. On the other hand, cryptocurrencies prices have shown a degree of seasonality historically speaking. However, as with every kind of investment, let alone the unpredictable world of cryptocurrencies, past performance is no guarantee of future results. It is advisable to buyers to hedge their bets. It is important to diversify your crypto portfolios with different altcoins to mitigate risks.

Non-Fungible Tokens

"Non-fungible” more or less pertains to anything and everything that is unique and can not be replaced with something else. For example, cryptocurrency is fungible — trade one for another, and you will have exactly the same thing. An unique trading card, however, is non-fungible. If you traded it for a different card, you will  have something completely different. Non-fungible tokens (NFTs) are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can serve as a medium for commercial transactions.

NFTs can really be anything digital (such as drawings, music, or if I may use Sheldon Cooper's thoughts from the sitcom Big Bang Theory, your brain downloaded and turned into an AI), but a lot of the current excitement is around using the tech to sell digital art.

This is where things start getting interesting. If NFTs are all about owning, transferring and trading/transacting in unique items like videos, piece of art, music in digital format, what is the ownership structure and copyright. One can always copy a digital file as many times as you want through the open internet media, including the art that’s included with an NFT. NFTs are designed to give you the ownership of the work, which can’t be copied, although the artist or creator can still retain the copyright and reproduction rights, just like with physical artwork. To put it in terms of understandable tangible physical art collecting, anyone can buy a Hussain or a Van Gogh print, but only one person can own the original.

So who does a NFT interest? As an artist, it gives you an avenue to sell work that otherwise might not have much of a market for, in spite of demand or aspiration. NFTs have a feature that can be enabled to be paid a percentage every time the NFT is sold or it changes hands, much like a royalty, making sure that if your work gets super popular and balloons in value, you’ll see some of that benefit. On the other hand, as a buyer, one of the obvious benefits of buying art is it lets you support the artists you like  or adore, considering believe it or not, NFTs are way trendier than, like, WhatsApp stickers or the likes. Buying an NFT also usually gets you some basic usage rights, like being able to post the image online or set it as your profile picture, along with the bragging rights of owning an original piece of art or creation, with a blockchain entry to back it up.

With the explosive development of decentralized finance, and uptrend in the adoption of NFTS, we have witnessed a phenomenal growth in tokenization of all kinds of assets, including equity, funds, debt, and real estate. It has been successfully applied to digital fantasy artwork, games, collectibles, etc. However, there is a lack of research in utilizing NFT in issues such as Intellectual Property. Applying for a patent and trademark is not only a time-consuming and lengthy process but also costly. NFT has considerable potential in the intellectual property domain. It can promote transparency and liquidity and open the market to innovators who aim to commercialize their inventions efficiently.

CBDC vs Cryptocurrency

While both the Central Bank Digital Currency and cryptocurrencies work solely through technology, each has its own unique characteristics that make it different from one another. 

Let’s begin with a case in point with the decentralised nature of Bitcoin (one of the primary examples of a cryptocurrency for the sake of this discussion). BTC is a cryptocurrency that isn’t governed by any central authority — neither by central banks and other financial institutions nor by its mysterious developer who lurks behind the name of Satoshi Nakamoto. On the other hand, CBDCs are governed and distributed by central bank and regulatory authorities like the RBI in India. This means that transactions and issuance of this currency will run through the government’s review and approval. The limits and distribution of CBDCs will also depend on the RBI. This governing body will be in charge of producing new digital coins should there be a need to release more.

Bitcoin has a maximum supply of ~2 Crore BTC set by its pseudonymous creator. Since BTC has no central authority, no one can change its maximum count—unless the protocol is altered, which is highly unlikely. CBDC, on the other hand, promises less volatility and greater security, something that cannot be controlled with a highly volatile asset like Bitcoin. Bitcoin also serves as an asset or a commodity that can be bought and sold on cryptocurrency exchanges or marketplaces. A CBDC, in contrast, is a digital legal tender and the only way to get it is through central banks.

While both the CBDC and Bitcoin work pretty much the same today, we’ve learned that each still offers its own unique potential. So, is India’s own digital currency really far from the uniqueness of BTC and the wonders it can offer?

Women and Investments

Only about a little over 10% of women make their financial decisions independently, leaving a staggering 9 out of 10 women allowing their male counterparts or advisors to determine their financial lives, which is surprising, considering that females are actually better in managing money and at investing. 

Let me visit the blessing in disguise. Women being over-skeptical and wary with inhibitions embedded by the society, research more, and hence tend to avoid risky adventures driven by whims. They thoroughly investigate all investment decisions and are open to feedback challenging their assumptions. It is thus paradoxical that despite having most the checkboxes ticked in their favour, women still rely on men, due to their own-built shells. In fact, as per several research and reports by lending players, banks, investment platforms and other financial institutions, women are better lenders, re-payers, and risk-tolerant than men. Women are also better investors as they speculate less, plan more, link a goal/objective to the investment, and thus diversify asset allocation better.

On this note, I wish all the ladies out there

 Happy Women's Day & Happy Investing!!

Centralised Digital Currency in India

While India is known as one of the leading countries in terms of digital payments innovations, the payments space has still not been monopolised by any corporate, social, or technological entity. The country facilitates payments that can be processed instantly almost anytime with minimal fees. This is probably why many multinational companies operating in India are now accepting digital currency payments.

Central Bank Digital Currencies (CBDCs) are legal tender created by the central bank of a nation, though in digital form. The only difference between them and traditional cash or fiat currency is that CBDCs are digital. Unlike other cryptocurrencies that are DeFi or decentralised financial tokens, CBDCs will be backed by central reserves just like all other fiat currencies. The digital rupee is essentially going to be the digital representation of a rupee backed by the Reserve Bank of India (RBI). 

India is not the only country that is experimenting with a digital legal tender. The digital dollar, e-yuan, and digital euro are some of the projects that various central banks are experimenting with across the world. Moreover, unlike Bitcoin, which is a cryptocurrency built on the underlying blockchain technology allowing users to remain anonymous, the official digital currency will have the backing of the RBI. It means that the digital rupee is as good as a physical rupee for all transactions. A digital rupee will have the same value as the physical rupee.

The primary reasons behind the adoption of CBDC are:

• Central banks, faced with dwindling usage of paper currency, seek to popularise a more acceptable electronic form of currency
• Jurisdictions with significant physical cash usage seeking to make issuance more efficient
• Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies

Reducing the economy's reliance on cash will open ways for cheaper, faster, and more convenient international payments and transactions, while promoting more real-time and cost-effective globalisation of payment systems.

Apart from building a cashless economy, the digital currency is also considered to be an instrument in promoting financial inclusivity and modernizing the current banking sector of India, while also protecting the people from the volatility of private cryptocurrencies.

What remains to be witnessed with the dynamics of Indian demographics and diaspora, will the launch of CBDC help in further empowering the digital economy of India.

Annual Financial Goals

The new year always seems to arrive faster than we think. But it’s never too early or too late to think about your goals for the year—there’s no rule that you have to make all your resolutions on 01-January! Figuring out your yearly goals can be an ongoing process.

The idea of setting goals for the year isn’t meant to lock you into a rigid mindset of success or failure; it’s simply meant to help you reflect on what you want out of life and create steps to get yourself there.

The best goals for the year will depend on where you are in your financial journey. It's always good to see where you stand and update your goals if needed.

*Emergency Fund*

A perfect first financial goal to have because this is the savings that will allow you to weather a job loss or other surprise expenses without going into debt. The recommended amount you should have in your emergency savings is 3-6 months of basic living expenses, but if that seems overwhelming, work on saving your first 1000 and build from there!

*Monthly Budgeting*

A foundational financial goal because this is what allows you to get a full picture of how much you’re making, how much you’re spending, and where there might be a chink that can be managed.

*Side Hustle*

We could all use a little extra cash, to pay debts, increase savings, achieve a financial goal, or retire earlier. No matter what it is, starting a side gig can help speed up your goal timeline.

*Retirement Planning*

The sooner you start saving, the sooner that coveted financial freedom will be within your grasp.

*No Spend Challenge*

While you pay for the essentials like rent, gas, utilities, groceries, and other necessary things, this is a chance to identify bad financial habits and go from usually a couple of weeks to a month, in which you eliminate all non-essential spending.

Do whatever, however, whenever you want and can, but be sure to break up your financial plans into achievable modular short-term, mid-term, and long-term goals. You should also outline the financial goals so that they are measurable and tracked for progress. Also, be sure to set weekly goals to help you make the big goals easier to achieve!

Cryptocurrency

Money is what money does. We are living through several concurrent financial revolutions, with the rise of crypto, Fintech, and Open Banking taking place simultaneously. Just a few short years ago, it seemed unlikely that crypto would enter the mainstream. But that’s exactly what’s happening today. Countries like China, the US and the UK are currently working on Central Bank cryptocurrencies, which would be digital versions of the Yuan, Dollar and Pound. Facebook recently launched a pilot of a crypto-wallet called Novi and is also developing its own stablecoin (a cryptocurrency pegged to another asset) which will be called Diem. Notably, MasterCard is about to give banks and merchants on its network the ability to integrate crypto into their products.

As crypto adoption grows at a rapid pace across the world, the big question on everyone's mind is - will cryptocurrency be the future of money? There is a growing intersection between the traditional financial world and the crypto world, particularly between banks and non-banks. Traditional banks are looking to offer more digital asset services and this will drive more interoperability because at the end of the day people, companies and governments need to be able to use different sources and mediums of money interchangeably and seamlessly.

The concept of currency is something that is constantly evolving. There was a time when currency was in in barter which got evolved to physical money (notes) which existed only in the physical form, but today, we can't imagine a world without digital payments. It may come as no surprise that at some point in the future, cryptocurrencies too will work as exchange currency. Many experts have estimated that the recent pandemic has hastened the decline of cash by almost half a decade, a few are asking whether digital currencies will actually succeed. Instead, it’s a matter of when they will go mainstream.

Single to Double: Money Management for Couples

Becoming a couple comes with a lot of compromises and discussions to get together on the same page when it comes to planning for the future and investing. Shortly after your wedding and honeymoon, reality sets in. When you start co-living and co-existing, you also start co-spending and co-saving. This may all seem a little overwhelming as you embark on this new journey. However, instead of shying away from your partner, adopt an approach that’s governed by absolute honestly.

When you get married, friends wish you to have joy and happiness in your marital life. However, a single word - ‘money’ can create a huge chink between spouses, owing to poor money management skills. If you can plan your money matters well, you can avoid any dispute with your spouse. 

Financial decisions are always better when taken together. Initially, couples may find it difficult to manage their finances due to differences in penchant for risk and priorities. This is common in most households, but, a couple should agree on having a budget and an investment plan to lead a financially stable life in future.

Budget Plan: Having a budget plan on spending is a must

Investment Plan: Discussing investment according to the financial commitment and risk capacity is a good idea, as each person will have their own interest and ideas of investment. Some individual are risk averse while some like to invest in risky assets.

Emergency Plan: Maintain an emergency fund where the funds are readily available on an immediate basis, to be used when one has taken a break from work or when there is no income from one of the couples.

HRA: If couples are living on rent they can split the HRA. This would ensure that both can claim HRA benefits under 80C of the Income Tax Act.

Insurance: Couples should have separate term insurance as well as health insurance which will take care of the expenses at the time of need.

Commotion of IPO Hysteria

With hullabaloo around the IPOs hitting the markets yet again following the trend throughout 2021, with the companies going public in a rush, a primary consideration is that a trend in the market can be a double-edged sword with the flip side risk commensurate to the upside potential. The motto in the investment parlance should be "You Win Some, You Lose Some". While India's primary market has attracted a lot of interest from the investors with more than 2X funds raised by firms on a Y-o-Y comparison between 2020 and 2021 (till end of Oct'2021, and several still tentatively lined up before the end of the year), not all who received allotment garnered a fortune.

Many investors have been searching online and consulting financial advisors for strategies and tricks - tracking GMP, putting through multiple applications through demat accounts held by friends and family, applying at the earliest possible from the IPO opening hours etc to improve the chances of getting an allotment in a ‘Good IPO’. However, these strategies seldom work in a highly unpredictable IPO market. No wonder, Warren Buffett said it right: “An IPO is like a negotiated transaction - the seller chooses when to go public but it’s unlikely to be at a time that is favourable to you.”

The real game analysis and predictability is built upon the capability to segregate the bad apples (over-priced, over-valued, poor quality business, and disastrous motivation for listing) from the right bets (growth prospects, business & industry stability, and future earning potential). Many times expectations and IPO price are too high to subscribe at the time of IPO. As a company takes some time to deliver on expected growth, impatient investors or investors with a myopic vision (just for profit making to make a few quick bucks) sell out. Investors who are optimistic of the changing situation and macro- or micro- economic factors that will or may influence the price movement, buy in or stay invested and benefit from any appreciation. Only savvy investors understand the meaning and value of being “patient” with companies which have long-term potential.