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Top 7 Factors to Consider Before Applying for a Business Loan

by Sonal Shukla

Unsecured Business Loans are the go-to credit instruments for many SME owners looking to manage their business operations and meet expansion goals. Although these are easily accessible with NBFCs, aspiring borrowers should never take them lightly. Detailed research is necessary to procure funds quickly and make their best use for the business. Let us consider a few factors before applying for an SME loan. These factors will help determine a suitable loan scheme for the unique financial requirements of a business and confidently take the loan decision forward.

1. Lending Institution’s Reputation

Since there are numerous NBFCs and lending institutions in India, not all have the same loan plans and offers. Some may seem better than others in various aspects. Those who seem too good to be true are not the best but are sometimes risky. Here are a few red flags to look for while applying for a Business Loan:

The NBFC does not have a minimum credit score requirement or clear eligibility criteria.
The NBFCs website does not have a physical address, and they do not respond to calls at the given phone number.
Loan fees and other charges are not transparent.
The customer representatives pressurise loan seekers to accept the loan offer immediately.

Instead of applying for a loan with such NBFCs, look for positive reviews and gather referrals to make an experience-based decision.

2. Loan Type to Borrow

Lending institutions offer different types of Business Loans to SME owners. Some of the most popular options include the following.

Term Loans: These loans have set loan terms and amounts.
Line of Credit: Borrowers have a set loan amount to borrow. They can borrow the required amount from the credit limit and pay interest only.
Equipment Financing: Business owners looking for finance for equipment can get a machine loan to fit their needs.
Merchant Cash Advance: Retail store owners who frequently accept credit card payments can get a cash advance against their transactions.
Working Capital Loans: If business owners have difficulty sustaining everyday operations, they can take a working capital loan to stay afloat during tough times.
Loan Against Property: Those looking for a secured loan with high amounts and lower interest rates can take a LAP.

Before applying for a Business Loan, ensure the loan type fits your  business’s financing needs. Moreover, each aspiring borrower may not qualify for all these loan types. It is imperative they check their loan requirements and eligibility before applying.

3. Loan Amount

Sometimes, the loan offer might have a lower amount than required, which is insufficient to cover the current funding needs. Accepting such a loan offer will fail to cover the expenses, and you might end up asking for more. At other times, the lending institution might offer a higher loan amount than requested based on the applicant’s creditworthiness and repayment capacity. Just because the NBFC provides an ample amount does not mean that you  should accept it. Over-borrowing may make repayment challenging and increase financial stress.

So, determine the correct utilisation of funds and decide on the loan amount borrowed. Ensure it is not excessively more or less than the current funding requirement. It should be enough to achieve your  business goals and not overextend your  finances.

4. Collateral Requirement

Business Loans can be secured or unsecured. Borrowers have to provide collateral security for secured Business Loans. If they default, the lending institution can seize the asset to recover their money. On the other hand, unsecured Business Loans have no collateral requirement. These loans are less risky for the borrowers as they do not need to pledge an asset as collateral. So pay attention to the lending institution’s collateral requirement before applying.

New-age lending institutions like Clix Capital provide collateral-free Business Loans of up to Rs 50 Lakh at competitive interest rates to entrepreneurs with minimum documentation and a quick approval process. There are many others, and we recommend finding the one suits all of your interests.

5. Repayment Terms

Examine the lending institution’s repayment terms and decide if the EMIs comfortably fit the borrower’s monthly budget and repayment capacity. Use a Business Loan EMI calculator to estimate EMIs for a particular loan term. If you think the EMI amount will stress your  monthly finance or are worried about missing the due dates, opting for a longer loan tenure will reduce the EMI amount and make it more manageable. Missing the payments will increase financial stress and affect your credit score negatively. However, remember that opting for a longer term will increase the interest outgo and make the loan more expensive.

6. Payment Process

Apart from repayment terms, the payment process is crucial when deciding on a loan plan. Understand the lending institution’s payment process and know if they request weekly, bi-monthly, or monthly payments. Besides that, find out how to make payments – through cheques, transfers, automatic withdrawals, or another method. Ensure that you are  comfortable with the payment process and method and maintains a sufficient balance to activate the e-mandate.

7. Interest Rate

The interest rate determines the overall loan cost the borrower has to pay. A lower interest rate means more money saved and enhanced EMI affordability. Do the calculations and figure out how much the loan will cost with the interest rate. Also, check the interest rates of various loan options and opt for the one with the lowest figure. Most NBFCs determine an applicant’s interest rate based on their business type, vintage, turnover, credit history, and other crucial factors. Those with a decent credit score will get the lowest interest rate with easy loan management.

Remember that it’s not wise to accept any Business Loan offer immediately. Review the Business Loan plan and decide what loan amount, repayment term, and interest rate to go for. Once your loan is approved, and investing it right will help your company achieve its success goals. Consider the factors mentioned in this article to check the details of different loans and opt for the most suitable Business Loan.

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