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Chennai, a major financial hub in India, offers various options for businesses and individuals seeking short-term financing. One such option, though becoming less prevalent due to the rise of digital payment methods, is finance against cheques. This involves securing a loan or advance against post-dated cheques provided as collateral.
How it Works:
- Application and Assessment: A borrower approaches a lender (which could be a NBFC – Non-Banking Financial Company, private financier, or sometimes even a bank) with a need for funds. They submit an application along with post-dated cheques covering the loan amount plus interest and fees. The lender assesses the borrower’s creditworthiness, ability to repay, and the value of the cheques offered.
- Cheque Verification: The lender typically verifies the authenticity of the cheques with the issuing bank, ensuring the account is active and has sufficient funds (or a history of sufficient funds). This minimizes the risk of cheque bounce.
- Loan Disbursement: Once satisfied, the lender disburses the agreed-upon loan amount to the borrower.
- Cheque Deposit and Repayment: The lender deposits the post-dated cheques on the agreed-upon dates. If the cheques clear successfully, the loan is repaid as per the agreed schedule.
Advantages:
- Quick Access to Funds: Finance against cheques can provide quicker access to funds compared to traditional loan processes, especially helpful for businesses facing urgent working capital needs.
- Less Stringent Requirements: Sometimes, the eligibility criteria are less stringent than those for conventional loans, making it accessible to businesses with limited credit history or collateral.
- Flexibility: The repayment schedule can be tailored to the borrower’s cash flow, offering flexibility in managing finances.
Disadvantages and Risks:
- High Interest Rates: Finance against cheques often comes with higher interest rates and fees compared to secured loans or bank overdrafts, reflecting the higher risk for the lender.
- Risk of Cheque Bounce: If a cheque bounces due to insufficient funds, the borrower faces penalties from the lender and potential legal action under Section 138 of the Negotiable Instruments Act. This can severely damage their credit rating.
- Potential for Predatory Lending: The industry can be susceptible to unscrupulous lenders who charge exorbitant rates or employ unfair collection practices. Borrowers need to be cautious and deal with reputable financiers.
- Declining Popularity: With the advent of UPI, digital wallets, and online payment gateways, the reliance on cheques is decreasing, making this form of financing less common.
Important Considerations in Chennai:
In Chennai, as with the rest of India, it is crucial to thoroughly research and vet potential lenders offering finance against cheques. Check their credentials, read reviews, and understand the terms and conditions carefully before entering into any agreement. Due diligence is paramount to avoid falling prey to fraudulent schemes or exploitative practices. While it can provide quick access to funds, weighing the high costs and potential risks is essential.
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