Not every small business owner has enough money to meet all their needs. Many of them have little option but to borrow money to meet and grow business to the extent they want to.
Back then, taking a loan was a way to misery, something that you did when you could not manage your business finances yourself. However, times have changed and we have reached a situation where taking loans has become the norm of business growth.
Taking small business loans and paying EMI is an absolutely normal activity. Even though it’s the norm, not everyone should opt for a business loan. Also, not everyone is eligible for a business loan.
Here are 8 Important Things You Should Consider Before Applying For A Business Loan.
1. Understand the purpose of taking a business loan.
The first step is to understand why you need the money!See if this will benefit your business for years to come. Find out for what purposes can the loan amount be used. If not for yourself, the Bank will surely ask you for this. Many need loans for the purpose of buying more inventory, renting better and bigger space for business, investing in marketing your business, hiring more staff, etc. Knowing the need for the loan is sometimes vital: If the loan is required to buy business tools and machines, there are a number of banks and NBFCs that provide equipment and machinery loan and equipment finance.
2. Know what the business loan costs you before applying for one.
Taking out a business loan is a big commitment! Calculate the cost of your business loan. What is the interest rate it attracts, what will be the EMI, for how many years are you prepared to take the burden and so on. A business loan does have a huge price attached. Make sure you’re aware of the consequences.
3. Work out the business loan amount you’re planning to borrow.
Find out how much money you are falling short off in growing your business. You may have to apply for a business loan accordingly. You may be eligible for a higher amount, but it is not necessary to borrow that amount. By borrowing too much, you’ll struggle to repay the loan. Borrowing too little, you may end up applying for secondary loans too. However, it can be a challenge to figure out how much to borrow. Calculations go wrong, you may underestimate or overestimate the cost of a few and very few things go exactly as planned. Always take a little higher than needed just in case of unexpected expenses. Not more, not less. Also, try to arrange the maximum of the down payment amount and less of the business loan amount so that the interest is kept at minimal. Never take too much risk.
4. Calculate your capacity for collateral.
In simple words, you will be instantly eligible for loans if you have sufficient collateral. At least, your loan application won’t immediately be rejected if you have sufficient collateral. Banks feel much more comfortable if you have assets that can repay loans in the worst case. Collateral includes your houses, cars, stocks, bonds, and cash –– all things that are readily convertible into cash to repay the loan. But, for small business loans, the banks consider even your assets such as equipment, accounts receivable, and (in some cases) inventory as collateral if they can be sold by the bank for cash.
5. Research all the borrowing options to find the right fit.
There are a lot of ways to secure loans. Some borrow from family or friends, others use credit cards. Still, others seek business loans from small finance companies, online lenders for a faster loan process without collateral requirements. Often, banks are the first place people look. Look specifically for “small businesses loans”, this increases your chance of getting the capital you need. Fully understand the terms of your loan, including the total cost of capital and the payment schedule.
6. Understand the interests and charges it carries.
Different banks have different loan schemes. Shortlist a few banks or NBFCs that you may want to apply for loans. Check what is offered to you in terms of a loan. While we often only look at interest rates, there are many other aspects to consider before we decide which offer to take. See what suits you the best and what may work out for you based on how much EMI you can afford.
7. Prepare your financial documents well.
Have your business finances in order. Especially for no-collateral loans, banks are very particular about whom they extend the money. Keeping proper books of accounts is very important before applying for a loan. It is vital that you go through them to clean out errors. Banks generally ask for the balance sheet of the company, profit and loss accounts, cash flow statements, tax audit reports, etc. Beyond these financial statements, you may be asked to provide current year business performance and it is important to get this right. The bank has to make sure that you’re able to repay the loan on time. If you’re digitally managing your business accounts using billing software like Vyapar App, you are saved! It eliminates lots of unnecessary time & effort involved to get this done.
8. Calculate what you can afford to repay and how to go about the rest.
Take a loan that you can easily repay. Never ever borrow more than you can repay. Calculate your loan to income ratio. This is what bank calculates too – ‘how much you can afford to repay’. The loan you can borrow depends on how much you can afford to repay in EMIs.