Every single businessman, whether as a start-up or an established entity, needs funds to go for further expansion of the business, upgradation of its equipment or hiring the required manpower for the job! Business loans, in some exceptional cases are also used to purchase a competitor purchasing the majority of their shares.
But taking a loan could also backfire in some cases, which may result in severe losses for your business. Therefore, you need to assess if your business is in the right position and financial shape to go for a loan?
Consider the following points before applying for a business loan:
1. Business requirement
The first obvious checkpoint lies at assessing the loan amount it requires, time period in which they want to receive the amount, if they even need a loan that is.
This is also the first question that a lender would ask, and so it is best if you have a written business strategy in your person during loan application. The strategy should reflect on your vision of the business position in the next 6-12 months and 4 to 5 years, i.e. short term and long term vision!
There are other factors to consider as well, like monthly revenue of the business, overhead costs, existing loans, etc.
All in all, your loan amount should not go beyond your revenues that is what lenders would primarily look into. So, it is wise to get it sorted before they get a look in!
You would also have to assess the emergency of the situation where you need funds. If you can wait up to a week, banks could be a suitable option. If you want your loan amount processed within a couple of days, you may consider NBFCs who have minimum documentation and formalities, but charge a higher rate of interest than banks.
2. Ascertain the true cost of loan
Rate of interest also matters, as it helps you to assess the real cost of borrowing. Check with multiple lenders regarding rate of interest and set a maximum limit for the time period you wish to borrow the loan.
From there on, you can assess which lenders provide you the best value for the amount your business is willing to pay.
Additionally, there are more costs to your loan than the principal amount and interest. You also have to consider the application fees, valuation fees, legal fees and stamp duty charges.
Knowing all of this will help you to arrive at the true cost of your loan.
3. Know the information to be provided
It is advisable to know all about the information that you have to provide in order to get your books in order and complete the formalities on your end for a quicker grant of loan.
Asking for the information to be provided is important because different lenders have different requirements pertaining to documentations.
4. Type of loan required
There are multiple types of business loans as well. Do you want a secured loan or an unsecured loan? Secured loans may require you to grant sureties against it, but the rate of interest for secured loans are lesser than unsecured loans.
Lastly, you may consider assessing loan providers, i.e. banks or NBFCs. NBFCs process loans quickly with minimum documentation requirement and generally, without any collateral. However, they charge a higher rate of interest than banks. Also, different money lenders have varying interest rates.
5. Credit history
Personal and business credit histories play a vital role in successful loan applications. A good personal and business credit history also ensures that you will be charged a lower rate of interest by most lenders.
Generally, credit scores, or CIBIL score of the applicant and the business should be at least 650 or above in order to be eligible for a business loan.
If you want the lowest interest rates for the loan amount you need, it would be best to take measures that increase your credit scores, like paying bills and taxes on time and past loan repayments on time.
Though it is a normal thing for businesses to take loans to conduct their day-to-day operations, doing so without due deliberation could be risky. You do not want to get stuck on repayments that you cannot afford.
If you are still sceptical about borrowing a loan, you can also ask around in your business circle and online forums with your fellow entrepreneurs. Chances are that they have taken business loans before.
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