Running a business is not a child’s play. You always need a robust funds back-up. At one point or the other, every business owner needs some financial assistance, usually in the form of a Business Loan.
While a Business Loan may be your best bet, it is not as straight forward as asking a friend for a few hundred rupees. The bank credit comes with its own set of challenges, making it rather tricky to pick a Business Loan that will best serve your needs while being easy on your pocket.
To ease your task to Apply for Business Loan in 2020, we bring here a handy checklist that requires your due diligence.
Before approaching a lender for a Business Loan, you must have a clear picture of how much funds do you need. This calculation should be based on your existing capital, expected revenues, current liabilities, and the cost of operation/ projects/ expansion/ diversification that you’re planning to undertake.
Moreover, your desired loan amount should be in tandem with your past and current financial situation. For instance, if you have a turnover of Rs. 20 Lakhs per year on an average, expecting a business loan of Rs. 5 crores will be unjustifiable.
You must understand that a Business Loan is considered a high-risk proposition by lenders considering the underlying possibility of the failure of a Business Plan. Hence, the onus of choosing a loan amount that is both reasonable and financially viable lies upon you.
Based on the loan amount you’re seeking, go ahead with a shortlisting of lenders that offer loans in that particular bracket.
A Business Loan entails a substantial amount, at a subsequently high-interest outgo. The interest on the loan amount is a primary factor which dictates the cost of the loan. The additional charges include an origination fee, processing fee, documentation fee, commitment charges, remittance charges, legal fee, late fee penalty, prepayment penalty, and foreclosure charges.
Hence, when you set out to compare different Business Loans from various lenders, you should factor in the overall cost of the loan on the basis of both – interest rates as well as additional charges.
Most lenders offer Business Loans in two distinct modes: Term Loan and Line of Credit.
A term loan is the one wherein the entire loan amount is disbursed in one go, and you will be required to repay it in the form of equated monthly instalments (EMIs).
On the other hand, a line of credit loan pertains to the system wherein the bank offers you a maximum credit limit based on your loan requirement and your repayment ability. Once your loan is approved, you can withdraw the desired amount of money (within your credit limit), as and when required. An inherent benefit of this loan type is that the interest will be levied only on the amount used, and not on the entire approved limit.
Hence, when you’re Applying for an SBI Business Loan, you must enquire about the availability of both the products and opt for one that best suits your needs.
When you take a step towards opting for a Business Loan, such as YES Bank Business Loan, you must have a clear picture of how you plan to use the procured funds. Whether you wish to use the money to meet your working capital needs or to purchase new fixed assets for the business, or to expand the business or to diversify it, or whether you have an upcoming project that needs to be funded.
You must have a detailed plan pertaining to how you will recover the used money over time through the business revenues. Only when the lender is convinced that you will be using the money for a viable purpose and that you will be able to recoup the same, will they approve your loan application!
Hence, when you set out to choose a lender, make sure you are likely to be approved by the lender for your business idea, else you may have to face rejection.
A Business Loan is usually extended as a secured loan, such as Loan Against Property. You are required to pledge some assets in exchange for the loan amount. This asset may be in the form of property, equipment, or even your inventory. In some cases, you may also be able to pledge your accounts receivable. Depending on the asset you pledge, you must try finding a lender who will readily accept the same.
Moreover, different lenders have different LTV ratios for the loan. For instance, one lender may be willing to offer a loan of Rs. 10 lakh against an asset valued at Rs 4 lakh, while some other lender would need collateral worth Rs. 8 lakh for the same loan amount. Hence, you should check the security that a lender requires before you apply for a Business Loan.
To find the right Business Loan for your venture, you should be willing to disclose your sales revenues. Moreover, your revenues should be in line with your loan requirements. If your revenue is exceptionally low, or if your business is incurring consistent losses, the lender may not approve your loan application. Hence, if your business is in a dire situation, you must only approach a lender who will still be willing to offer you the loan amount despite your current financial situation.
Choosing an ideal Business Loan will become quite convenient if you consider all the factors mentioned above. A right Business Loan will not only help you make the most of the underlying opportunities but will also pave the path for your present and future financial freedom.
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