Usually, a business loan becomes a prerequisite to open a new enterprise or run an existing company’s operations. However, securing a loan is a challenge, especially if you are a small business. While several banks and financial institutions offer business loans, they have stringent approval criteria. At the same time, you also need to make an informed decision before you sign the dotted line.
Here are some factors you should bear in mind to apply for a business loan in 2022:
- Purpose of Loan
Ask yourself why you need a business loan. It could be to buy a piece of new equipment or inventory. You may want to spend on marketing or a new product Mostbet app apk download. You may require it to meet the working capital needs. The identification of the right purpose will help you apply for the right kind of loan.
You can prepare a business plan, weighing all pros and cons of taking a loan for that purpose. It will enable you to do the feasibility analysis of the loan. A business plan will also come in handy in submitting a loan proposal to the lender.
- Loan Amount
Find out the amount of loan you want to avail. Of course, you want to get the maximum amount possible so that you can build or expand your business. However, the higher the loan amount, the higher the interest amount you will have to pay. Moreover, a large loan amount increases your liability on the balance sheet. Hence, you should borrow what you want and fits into your budget.
You can calculate the loan amount by assessing your personal and business assets and liabilities and expenses you will incur on the purpose of the loan.
- Eligibility Criteria
The eligibility criteria for a business loan vary from one lender to another. Try to choose a lender who gives maximum relaxation on the eligibility criteria. This way, you will take maximum advantage of the loan.
Many lenders require you to place collateral such as your home, car, equipment, inventory, or any other property while applying for a business loan. If you default on the loan repayment, the lender has the right to confiscate your collateral. This is called a secured loan. Ideally, you should look for unsecured loans to lower the risk of losing your asset. However, do note that unsecured loans have a higher rate of interest. So, make your decision wisely.
Documentation is an integral part of a business loan application. All your documents must be up-to-date to avail of the loan quickly and easily. Here is the checklist of documents you need to submit:
- Personal ID and address proof
- PAN card – personal and business
- Company registration papers
- Proof of business ownership
- Profit and loss statements
- Balance sheets
- Memorandum of Association
- Articles of Association
- Income tax return statements
- Proof of continuation
The lender can demand other documents in addition to the above as part of the verification process.
- Credit History and Score
The lenders check your credit history and score when they sanction your loan. Credit history refers to the number of loans and EMIs you have taken and whether you have repaid them on time. The credit information company TransUnion CIBIL assigns a credit score based on your credit history, and all lenders across India accept it. The credit score falls between 300 and 900. The higher the score, the better chances of getting a quick loan or a lower interest rate.
- Interest Rate
Understandably, you want the lowest possible interest rate. However, the interest rate calculation is out of your control. It depends on many factors such as:
- Personal background of the entrepreneur/business partners
- Credit history
- Personal and business income
- Type of business
- Minimum years of business operation
- Monthly turnover
The interest rate on loans for businesses is different from one lender to another. Usually, lenders display the interest rate chart on their websites. You can even compare interest rates on the loan aggregator website.
- Tenure of Loan
A long tenure will give you more time for repayment, and the EMI amount will be less. On the contrary, a short tenure will put an EMI burden on you and give you limited time to repay the loan. Hence, try to choose a tenure that doesn’t put any financial pressure on you.
You will need to repay the business loan to the lender through monthly or quarterly EMIs. They are calculated on the basis of the loan amount, tenure of the loan, and interest rate. You can calculate the EMIs through online EMI calculators. This will help you determine how much EMI you need to pay and whether you can afford it. Accordingly, you can modify your loan amount or tenure.
- Foreclosure and Repayment Terms
The foreclosure and repayment terms of loans for businesses are important considerations. You can know the kind of flexibility you have in case you want to repay the loan before the tenure or there is some delay in the repayment.
- Loan Processing Fees and Other Charges
While applying for a business loan, ask the lender to give you details about the following fees and charges:
- Processing fee
- Foreclosure or prepayment charges
- Interest conversion charges (fixed interest to floating interest or vice versa)
- Late payment charges
- EMI bounce charges
These fees and charges add to the total cost of your loan. Hence, you should evaluate them thoroughly.
- Apply for Online Loan
Today, many lenders provide business loans online. You can get the loan at the click of a few buttons. The documentation is quick and easy, and the disbursal happens in less time than the traditional loan application process. Moreover, the interest rates are reasonable and affordable in online loans. Online lenders also give relaxation in the eligibility criteria.
A timely business loan can fuel your business growth and expansion in the right direction and give you a competitive advantage. However, taking a loan is a big decision as it impacts your business financials. Hence, you must consider the parameters mentioned above before you sign the loan agreement to make a smart choice.