Running your own business is a responsibility that requires a number of tasks to be done on the part of the owner. He is required to work for extended hours and at the same time, make sure that the business venture is on the right path to growth. In the initial years of the business, a business owner might be able to meet the monetary requirements of the business through his own funds, but there will certainly come a stage when his personal funds would not suffice. However, the requirement for the funds would remain there.
So, the best option here would be to avail a business loan. It will help the business owner meet the financial requirements of the business and that too without affecting the actual cash cycle.
What is a Small Business Loan?
A small business loan can be best described as a credit facility extended by the banks and other financial institutions for a business owner. The small business loans are meant only for investment in business and related activities. There are a number of things that a business owner must keep in mind while availing a business loan, such as business loan interest rate, repayment tenor, and the business loan amount sanctioned, as it is sanctioned as per the eligibility of the borrower.
How to Apply for a Small Business Loan?
Applying for a business loan has turned a hassle-free task and the credit goes to the integration of the technology in the financial services sector. A borrower can have access to a number of online finance marketplaces and get access to all the important information regarding the borrowing options and different lenders. The small business owner can also apply for a business loan online. However, a small business owner can choose any channel, online or offline, to apply for a business loan depending on his comfort and convenience.
Different Types of Business Loans
Business loans are majorly categorised as two types – secured business loans and unsecured business loans.
Secured Business Loan: This type of business loans are secured against a collateral (usually an asset having some monetary value) with the lender to secure the business amount. The money borrowed under the secured business loan has to be only utilized for the specified purpose. The maximum business loan amount that the borrower can avail is directly proportional to the value of the asset he has hypothecated. The business loans with collateral are usually suited to the capital needs of the business.
Unsecured Business Loan: This type of business loans are unsecured in nature. There is no need for the borrower to hypothecate an asset having monetary value to secure the business loan amount. The money borrowed under unsecured business loan can be used as per the will of the borrower, but only for business and related activities. The collateral-free business loan tenor varies from one lender to another. Other business loans depend on the purpose for which they are availed, such as machinery loan, working capital loan, etc.
Points to Consider While Applying For a Business Loan
In the present scenario, the banks and financial institutions are adopting strict approach while processing a business loan application due to the rising instances of bad loans, frauds, etc. In case the bank or financial institution find anything wary in the application, they most likely will reject it. Consequently, it has turned important for the applicant to take care of the below-mentioned points while applying for a business loan.
- The borrower must ensure that his CIBIL score meets the threshold specified by the lending institution. The credit score criterion might differ from one lender to another. However, the minimum CIBIL score for small business loans is said to be more than 700. A CIBIL Score more than this can certainly increase the chances of the application being approved.
- It is important that you do not file for small business loans to multiple lenders simultaneously. This shows your credit hungry behaviour, which is a red flag for most lending institutions.
- Ensure that you prepare a detailed project report of the business and you submit it along with the application for a loan for the business. Also, the business report must have other supporting documents.
- In case you have any running business loans, make sure they are repaid on time. Business loan repayment track is required by most of the lenders to check your eligibility and bounce rates and write-offs if any.
- Keep an eye on your credit report and bank statement of both personal and business account. Make sure the bank account have a good balance record and there are no instances when your cheque was bounced.
- Take the help of professionals like chartered accountants and company secretaries, in case you do not understand anything. Their help is especially important while preparing the CMA data and other documents to support your business loan application.
- Get a detailed survey of the market done before finalizing any business loan lender. It is important that you have knowledge of the ongoing business loan interest rates and other related important information to make a sound decision. You can use both online and offline channels to get information.
- Make it a point that you read the business loan agreement in detail before signing it. There could a clause in the agreement which is disadvantageous to your interest. It is never suggested to run into signing the business loan agreement without reading it in detail.
- Negotiate hard with the lender on the business loan interest rate. A slight reduction in the business loan interest rate of even 0.25% can be beneficial for you.
- Now the most important, assess your business requirements carefully and then only opt to avail a business loan. A business loan is a borrowed fund that comes with the interest expenses. Borrowing the money with interest and keeping it in the bank account make no sense at all. Borrow only that amount that you require, even in the case when your business loan eligibility is for a higher business loan amount.
Availing a small business loan can be termed as the wise decision in case your business is facing a paucity of funds. The funds so availed can help you ensure the expansion of your small business in a time-bound and hassle-free manner.
About the Author
Rahul Setia works at Ziploan.in, RBI registered NBFC as AVP Digital Marketing. Rahul enjoys creating innovative marketing strategies and is an expert at website data analysis. He is passionate about blogging and frequently shares his extensive knowledge through guest posts on different portals. Rahul has done his bachelors in Information Technology from Gurgaon.
