Timely finance is the cornerstone of running a successful and profitable business. Not having access to funds when required could become an impediment for any businessman be it an owner of a small setup or a big one. Business loans like all other loans are extended based on certain conditions being fulfilled by the applicant and if one fails to do so they could miss an opportunity of expanding their business or maybe lose out on a important order or transaction. Here are a few rules that need be followed before taking a business loan.

  • Don’t Borrow More Than You Can Afford:

This applies to all the loans and especially so to a business loan. One might be tempted to take a bigger business loan thinking that they can pump in more money and expect bigger returns but this is not essentially the best approach. Before you start getting the returns you need to repay the EMIs regularly and one must ensure that they have the math worked out before applying for a loan. Having a big EMI burden could leave you with a cash crunch and can compromise your liquidity.

  • Do Shop Around:

Interest rate is one of the most important factors when deciding from where to borrow. There are a host of private banks, public banks and NBFCs offering business loans, thus it is important that the business man check the various available options before making a choice. The interest rate impacts the monthly outflow and as well the overall cost of the loan and in turn will impact the overall profitability of the business too. Here it is important to mention that the borrower must also check other costs and terms of the loans. The interest rates in current times vary from 12.9% to 21%, the process fee is pegged at usually 2% except for HDFC business loan where the processing fee is 2.5%. Also keep in mind the loan tenure and if it is in line with your requirements. ICICI Bank offers the option of taking the highest amount as loan. When making enquiries also check about the eligibility criteria and the acceptable credit score.

  • Be Ready with the Required Documents:

All loans are given based on the borrower fulfilling the eligibility criteria and submitting the required documents. For non-business loans the requirements are less stringent but for a business loan one needs to submit a few financial statements too. The prospective borrower needs to have their Profit and Loss statements, Balance Sheets, Cash Flow Statements, latest ITR, proof of continuation and Declaration of sole Proprietorship, Memorandum’s certified true copy and Articles of Association (as the case maybe.) So before you apply for the loan make sure you have all the documents ready well in advance.

  • Focus on the Credit History:

Another aspect that is common across all loans is the importance of the credit history is getting the loan application sanctioned. Before a lender agrees to accept a loan application they will like to access the credit history of the business entity to ascertain their credibility. The lenders will also seek the CIR of people who are in important positions of the business to determine if they are likely to repay their loan in a timely and disciplined fashion. The credit history is an important factor in the decision making process for the lender when it comes to accepting a business loan application. Before applying for a business loan the applicant must get a free cibil score so that they can ascertain their credit health well in advance. Improving credit history takes time so if required one must have sufficient time before applying for a loan to work on their credit score so that the loan application is accepted. If your credit score is less than the optimum level then you should make sure to approach a lender who is willing to lend at your score. This will help you in two ways; first you will not miss out on valuable time trying to approach a new lender when the application is rejected due to low score and second multiple enquiries for your CIR can be avoided.

  • A Sound Business Plan is a Must:

As the name clearly states business loans are given for the purpose of financing a business, this may be expansion of a business or setting up a new business. Either ways the bank will want to assess your business plan (new or for expansion) before they agree to lend to you. The lender will want to ascertain whether the money being borrowed is for a viable project or not. The goals, revenue projections and cost estimates should be clearly stated.

So for all you budding entrepreneurs or those who already have a business but are looking at expanding it, the above rules can help you make your dream come true.

More Under Finance

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

November 2020