Business Loans Grants
Business loans grants are given by the government of the country or a state to the priority sector businesses to stimulate growth of entrepreneurship in the desired sector. The decision of the government may be led by its commitment to the citizen to encourage growth in employment, standard of living, distribution of income, redistribution of private wealth etc.
When most of the factors that underlie the ways of materialization of commitment are the function of gross domestic product, any change in the values of the factors signify a change in the same direction of the gross domestic product.
Now, business loans grants are although in the nature of loans, realization of the principal and/or interest, if the loan is interest bearing, is postponed for a predetermined period of the existence of the business. In other words, the government allows moratorium for a period on realization of the principal and the interest, if any, for a certain number of years. The period of moratorium is decided by the government and the funding agency implements the moratorium policy of the government in the recovery. The decision of the government in fixing the period of moratorium for recovery of the principal and/or interest is influenced by the following factors-
(i) the minimum gestation period that may be required by the business unit to cross the break-even point of earning;
(iii) The general inclination of the entrepreneurs to venture into the sector of business which may be considered by the government for the loans grants;
(iv) The volume of capital required to launch a business in the target sector;
(v) Whether the business is capital intensive or labor intensive.
Generally, government takes over the responsibility of distribution of business units among the various sectors, since left to themselves, the entrepreneurs opt for the sectors of business for launching new units that yield the highest profit within the minimum period of time after investment. In other words, their objective is one-dimensional, i.e., earning maximum profit or the highest rate of return on investment and spending. Since government does not disburse the loans grants itself, the funding agencies do the job as per direction of the government.
Business loans grants are generally allowed to the following sectors-
(i) Infrastructure building sector, such as, power, road, agro-industry etc.,
(ii) Small scale industry for products which may be reserved by the government for the said industry;
(iii) Labor intensive industry if the labor is easily available and effectively employed through encouragement to the business, or capital intensive industry if the labor force is not easily available because of low population growth and it being costlier than mechanical force.
Another form of encouragement or incentive given by the government is subsidy to the target sector of business. This is given by the government either in the form of supplying raw material of the business at low cost, or cash subsidy disbursable by the funding agency to the intended business unit which has been sanctioned the same.
The funding agency which is responsible for disbursement of the loans grants to the business units is compensated by the government for the opportunity cost of the fund disbursed as loans grants or subsidy. This compensation may be direct or indirect. Direct by making available working capital at low cost or no cost or indirect by allowing rebate in taxes payable by the funding agency to the government.
The loans grants recipient business units are expected to grow in the desired direction or line because of the low or no cost of the business loans. As a precondition of the loans grants the recipients are required to produce the proof of continued existence of the unit and working of the unit and its profitability. In case of deviation from the desired profitability the funding agency may help the unit by engaging its own consultant to assess the situation in the business as a going concern and the way of improving the business yield of the loans grants recipient unit to the desired level. The cost of consultant being as it as has to be borne by the loans grants recipient. The units of the target sector in receipt of the business loans grants are expected to remain alert to such an eventuality and be geared to the expected employment rate, minimum lay-off, and minimum labor turn over, desired level of profitability etc. Desired level of profitability has been used with a tinge of service motive which is expected of the business entrepreneurs and if applied may act against earning maximum profit.
Thus, business loans grants both the funding agency and the target sector of business to bring into the playing field of business activity not only the profit motive but also the social service motive. While the former motive encourages the entrepreneur to remain in the business, the latter motive encourages the government and the society to desire survival of the business. The social service motive of the business unit in the target sector imposed through the loans grants scheme makes the entrepreneur to conform to the government intention of employing the labor force and capital in the manner expected to produce the desired quantity of product and rate of productivity which in its turn contributes to the gross domestic product of the state and the country.
The funding agencies are desisted from being driven by the profit motive only since they have to show a face of social service through complying with the government policy of allowing and disbursing business loans grants to the desired and target sector of business units. While doing so they are fully aware that the loans grants being disbursed by them are not recoverable for a certain period of time which is called the moratorium period and hence they have to bear the cost of capital involved in disbursement of the loans grants for the period of non-recovery, if not compensated by the government, either directly or indirectly.
Hence, the business loans grants may be called an instrument by which the business sectors may be made to bear their share of social responsibility.
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