Any business needs funds; right from setting it up, operating and expanding. The easiest form of finance is to approach a suitable lender. In the Indian context, the size of the SME and MSME sector is daunting. In fact, this sector alone contributes more than 40% to the GDP. The employing capacity of this sector is 80%. On the flip side, most of the units being based in the rural areas of the country, the source of finance is informal.
Realizing this dichotomy, the Government of India has launched initiatives with attractive subsidy aimed towards enterprises in this sector for funding from banks and NBFC in an attempt to formalize the economy. This entails discipline as the primary factor to make the units eligible for an appropriate business loan. Before approaching a lender, you need to understand what to look for in a business loan.
The contours of a business loan:
There are various means to ascertain what factors are important for a business loan. You may ask around, query your friends or scan the portals of various lenders to get enlightened about the highlights of their business loan product. A typical contour of a business loan should comprise the following from your evaluation as to where you fit.
Salient Features of a Business Loan:
|Eligibility:||Proprietorship, Partnership, Limited Company, Co-op Societies etc.|
|Purpose:||Manufactures, Services, Sales, Marketing, Goods etc.|
|Type:||Term Loan, Cash Credit and Overdraft|
|Quantum:||Up to Rs.2 crores, for Government sponsored loans Rs.1 crore.|
|Interest:||It varies from lender to lender, but most banks relate it MCLR|
|Fees:||Most lenders charge a fee starting from 0.50% with a min and max cap.|
|Repayment:||Varying terms from 1 year to 7 years.|
|Security:||Both Secured and unsecured|
The relevant questions to answer:
Armed with the salient features from the portal, you are now in a position to gauge the approach you should adopt to clinch the right business loan for your business.
- What is your fund requirement?
- What do you propose to do with the fund?
- What is the envisaged time schedule for paying back the loan?
- What is the length of your business experience?
- Are the financials of your business comfortable?
- What will you put up as collateral if sought?
- What is the status of your other loans and liabilities, if any?
- What type of finance you are looking for, short or long term?
- How healthy is your credit score?
Once you have the answers to these questions, you are making some headway towards identifying the right business loan and the lender who meets your requirement best. After all, the cost of capital becomes the key factor impacting the bottom line of your business, notwithstanding all other favorable features.
Tips for finding the best business loan:
You are now in a position to proceed to the next level, in such a way that your proposal for loan stands a good chance of going through the process of approval. Howsoever liberal the terms are, the lender looks for viable projects to fund. It makes sense for a while to be in the shoes of the lender to aid your preparation for the best business loan in the market. The steps to follow are:
Be sure with your paperwork:
Preparedness with the documentation prescribed by a lender reflects on your discipline in running the business. The important documents to assemble are:
- History of your business.
- Your KYC credentials.
- Financial statements of your business including the balance sheet, P& L account and cash flow to show the health status.
- Legal documents of your business.
- Bank statements.
- Documents supporting your credentials.
- Finally, a rock solid business plan defining its roadmap, viability and justifications for the figures quoted in the project report for the proposed loan.
Working out the financials – present and future:
It is very important to be precise in the financial projections and the road map envisaged in the project report. It is the measure that determines the quantum of loan you are seeking a deal for your business without cutting corners. Of course, financial discipline is a must for equitable utilization of credit funds and austerity is one of the means to impose it in right earnest. You can ensure adequate cash flow and concentrate on the maximization of your profits by prudent use of borrowed funds.
Careful scan for the right lender:
It is as important as choosing the right business loan. A lender who is offering the best terms in response to your specific queries is the right choice for your business. Your lender, in fact is your business partner, because it has as much interest in your success as you. If the project takes off as envisaged, not only do you streamline your operations and augment your profits, the lender is assured of the health of the business loan and its liquidation in the due term without default. It should also bother you as any delay or default is loaded with charges as penalty increasing the cost of capital.
Seeking right answers from the lender:
Having made an informed decision and landed up a good business loan from a suitable lender, it makes sense to seek some answers from the lender for your confidence and the benefit of your business. The questions to seek clear answers for are:
- How much is the overall fees payable including hidden, if any?
- What are the repayment terms and the final EMI and how it has arrived?
- Are there restrictions on the use of funds?
- What is the methodology applied in case of default?
- What if you need funds later?
Seeking approval in quick time:
The approval process and the time taken to evaluate a loan is a crucial factor for the time involved in the approval and disbursement of a business loan. It is ideal to seek quick approvals to make use of the borrowed funds, rather than allow the business to suffer.
A business loan is like a lifeline to its opening up the scope of further growth and expansion. The right business loan is therefore vital to its success. You have to leave no stone unturned including extensive use of online tools and expert advice to equip yourself with enough wisdom to make an informed choice. Choosing the right business loan and the right lender could be ideal chemistry for the success of your business.