Every businessman, whether a start-up or an established entity, needs funds to continue expanding the business, upgrading their equipment or hiring. of the manpower required for the job! Business loans, in some exceptional cases, are also used to buy a competitor buying the majority of its shares.
But taking out a loan can also backfire in some cases, which can lead to serious losses for your business. Therefore, you need to assess whether your business is in the right position and in the right financial position to obtain a loan?
Consider the following points before applying for a business loan:
1. Business requirement
The first obvious checkpoint is to assess the loan amount they need, the period during which they want to receive the amount, if they even need a loan.
This is also the first question a lender would ask, so it is best that you have a business strategy written in your person when applying for the loan. The strategy must reflect your vision of the position of the company in the next 6 to 12 months and 4 to 5 years, i.e. short term and long term view!
There are other factors to consider as well, such as the monthly business income, overheads, existing loans, etc.
Overall, your loan amount should not exceed your income, which is what lenders would primarily consider. So it is wise to sort it out before they take a look!
You will also need to assess the urgency of the situation where you need funds. If you can wait up to a week, banks might be an appropriate option. If you want your loan amount to be processed within days, you can consider NBFCs which have minimal documentation and paperwork, but charge a higher interest rate than banks.
2. Determine the actual cost of the loan
The interest rate is also important because it helps you assess the true cost of a loan. Check with several lenders for the interest rate and set a maximum limit for the period during which you want to borrow the loan.
From there, you can assess which lenders are offering you the best value for the amount your business is willing to pay.
Plus, your loan costs more than the principal amount and interest. You must also take into account the administration fees, appraisal fees, legal fees and stamp duties.
Knowing all of this will help you determine the true cost of your loan.
3. Know the information to provide
It is advisable to know all the information you need to provide in order to put your books in order and complete the formalities on your side for a faster loan granting.
It is important to ask for the information to be provided as different lenders have different documentation requirements.
4. Type of loan required
There are also several types of business loans. Would you like a secured loan or an unsecured loan? Secured loans may require you to post collateral, but the interest rate of secured loans is lower than that of unsecured loans.
Finally, you can consider evaluating loan providers i.e. banks or NBFCs. NBFCs process loans quickly with minimal documentation requirements and generally without any collateral. However, they charge a higher interest rate than banks. Also, different money lenders have varying interest rates.
5. Credit history
Personal and business credit histories play a critical role in successful loan applications. A good personal and professional credit history also ensures that most lenders will charge you a lower interest rate.
Generally, the credit or CIBIL scores of the applicant and the business must be at least 650 or higher 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 steps that increase your credit scores, like paying bills and taxes on time and past loan repayments. on time.
While it is normal for businesses to take out loans to carry out their day-to-day operations, doing so without prior deliberation could be risky. You don’t want to find yourself stuck on refunds you can’t afford.
If you are still skeptical about borrowing a loan, you can also educate yourself in your business circle and online forums with your fellow entrepreneurs. Chances are they have already taken out business loans.
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Posted on: Monday October 04, 2021, 4:00 p.m. IST