Small Business Loan – Importance of Choosing the Right One
When you are considering taking a business loan, there are a lot of things that you check out, both online and offline. One might check out business loan calculator emi, ask friends about online business loans, visit the websites of online loan providers and do a comparison of business loan interest rates. This due diligence is an important part of the loan application process and helps you understand the limitations and opportunities offered by different commercial loans.
At Lendingkart, we believe that choosing the right business loan is very important for MSMEs as it helps them in drawing out the full benefits of a loan. Here, we are sharing the points to look for when applying for a business loan online to ease your process of finding the right business financing.
Types of Business loans in India
Before we begin, let us have a look at the two types of business loans that you can take from marketplace lenders and banks. Albeit there are many business loan options, the borrower must go for the one which suits their need rather than one that is easily available.
Secured Business Loans: These loans are given in lieu of collateral from the borrower. So, even if the business is unable to pay the loan amount back, a lender can recover the money by selling or auctioning the asset taken as collateral. The drawback for first-time business loan seekers and startups is that generally, they do not have an asset of value to get a loan. Moreover, even if a new business has an asset of value, taking a loan against it doubles the risk for them.
Unsecured Business Loans: These are business loans without security or collateral. Here, the risk is borne by the lender. However, unsecured business loans do have slightly higher interest rates than secured business loans but not overly so. Unsecured business loans are best suited for small business owners who do not want to risk their personal assets. Moreover, with a good credit rating and financial report, a business can get unsecured business loans at lower interest rates as well.
Review Your Business Loan Requirement
Another thing that you should note before applying for a business loan is the actual requirement of capital for your business. Here’s why –
- With debt comes the obligation to repay on time as agreed. Although more capital can be used by an entrepreneur to enhance their business, availing a loan just because of availability may not be the smartest decision. If you apply for a business loan in excess of the actual requirements, it may lead to wastefulness. Also, the higher the amount the greater the EMI and interest repayment. So, while you will be able to fulfill the purpose of your business loan, you will also be generating unnecessary financial strain on your company by taking an excess business loan.
- Repeated applications for loans can have a detrimental effect on the credit score, hence it is imperative to be mindful while making applications. It is recommended to gauge and foresee the loan requirement in the short term future, and make a consolidated application.
- On the other hand, applying for a business loan below the actual requirement is also detrimental for your enterprise. One, your need for investment will not be met and you will have to apply for a second business loan or you will be borrowing money at higher interest rates from a private lender. Two, by not generating the cash in time you may lose a business opportunity for which you took the loan and the whole exercise will become a lost cause. Hence, it is essential to correctly understand the requirement and make an application accordingly.
After this, you can go for the business loan selection.
Fulfilling the Basic Criteria
It is very important to avail business loan that your company can easily service. When you apply for a loan, a hard query is sent to the credit rating agencies. Too many hard queries can bring down your overall credit score. Therefore, applying for a business loan for which your company is completely eligible is quite important. It will not only ensure quick disbursals but will also help you build your credit rating further up. There are certain basic requirements that the company should fulfill to avail a business loan. These basic criteria are common for all types of business financing:
- Documents : it is essential to have all the documents ready to avail a loan, ensure that the documents and information provided is truthful and verifiable for smooth assessment and processing.
- Business Plan : Lenders may want to check for a business plan to check for viability of the business, make sure that you have a solid business plan ready for lenders’ assessment.
- Past Financials and Forecasts : Financials statements from past 3 years and forecasts helps lenders make efficient assessments. Ensure that you have the same ready with no discrepancies.
Key Factors to consider:
Following are the key factors to consider before getting a lender to finance business loan, to ensure suitability, cost savings, and convenience:
Getting the EMI Calculations Right
Another important factor when taking a business loan is calculating the EMIs and planning your repayments accordingly. Sometimes you might end up taking a business loan which your business can easily repay and yet miss out on EMI payments. This happens when you do not calculate the EMIs correctly.
For example, you apply for a business loan of ₹10,00,000, which your business can easily repay in 12 months. However, you erroneously opt for an 8-month EMI schedule, which stretches your resources, wasting the benefits of the loan or even leading to missed EMI payments. It is also imperative to take worst case and best case scenarios into consideration. This will help you avail loan more responsibly. Also, having a quicker repayment plan can help you save on interest costs, and help wind up the loan quicker than the original tenure. However, be advised that earlier repayment has some applicable charges. So it is important to take these factors into consideration and make right calculations before availing a loan.
Selecting the Right Lending Partner
While banks are a common source of medium and small business loans for entrepreneurs in India, opting for a modern business financing institution might be a better idea for getting working capital finance. Non Banking Financial Companies offer several benefits such as low processing fees, short turnaround times, and easy business loan renewals.
At Lendingkart, we have simplified the loan application process by making it completely online. which adds convenience. Convenience is reason enough to consider LendingKart as one of the best place to get a business loan. Business loan interest rates at Lendingkart are customized based on business prospects of every individual applicant, thus making it easier to get a quick personalized business loan online. Also, we at lendingKart leverage big data which helps us make assessment quicker, we pass on this benefit to the applicants in the form of quicker loan processing, post which the disbursal process too is completely online. So upon loan approval the money may reach your account within 3 days!
Business Loan Processing Time
The processing time or business loan turnaround time is one of the most important factors to consider when taking a business loan. Banks often have a long process for approval and disbursal of funds. Moreover, banks are still stuck in the age-old methods of filings and paperwork which delays things even more. For example, upon approval of a business loan, the bank will issue a draft in your firm’s name which you will have to deposit in your business account and wait for the credit. Delay in processing of loans or a slow process in general can be detrimental to the applicant’s business as it may result in missed opportunities, or some other issues like missed vendor payment, etc. Hence, while availing a business loan, processing time is something which definitely has to be on your consideration list. So. if you are looking for an instant loan app, applying with a bank may not serve your purpose. Here, selecting a lending partner which can disburse funds electronically via bank transfers will save you both time and money. It’s not only the mode of disbursement but the overall loan journey. A digital application journey can help cut down on the end to end application time. This coupled with the fact that lendingkart leverages latest tech to make assessment lightning quick, brings LendingKart at the forefront in terms of convenience offered to the customer. For example, Lendingkart Finance disburses business loans online within 3-Days of loan application and approval.
Flexibility in Repayments
A business loan offered with the option of a flexible payment schedule is a boon for MSME loan applicants. The loan where the repayment syncs with the business receivable may prove to be the best business loan for entities with lean capital management. A commercial loan that lets you choose from a variety of repayment schedules gives you the freedom to focus on business development rather than on payment due dates.
Lendingkart Finance lets you choose a customized repayment schedule so that you can repay your business loan comfortably. If your business is thriving, you have the option to prepay the entire loan amount; however, pre-closure charges may apply based on the lender’s policy.
Concluding Thoughts
A business takes a loan to invest in its growth, therefore selecting the right business financing product remains critical to a business’s success. Today, there are a variety of online tools which help you assess the various loan products available online and make an informed decision regarding a new business loan. Also, by selecting the right financial partner, you can grow your business exponentially.
Visit our website www.lendingkart.com for a quick unsecured working capital loan quote. Therefore, by now, your question on how to choose small business loan should be answered.
Frequently Asked Questions
1. How can I determine the loan amount that best suits my business needs?
To determine the best loan amount for your business, the first thing to consider is the purpose of the loan. If it is to fund a special project then you may look at costs associated with the project, if it is to buy a machinery then the landed price of the machinery, if it is fund general working capital requirement, then you need to assess your current financials, project future expenses, and ensure repayments align with projected cash flows. Consulting a financial advisor can provide tailored advice. Also, conducting a business loan comparison will help you determine the best choice for you.
2. What’s the significance of the loan term, and how do I select the right one for my business?
It is imperative while availing a loan to choose the repayment tenure that is most suited to the business’ ability to generate money. It is always smart to have some cushion in terms of final calculated repayment amount. The loan term impacts monthly repayments and total interest paid. Choose a term based on your business’s cash flow and ability to repay. Shorter terms often have higher payments but less interest overall.
3. What are some common mistakes to avoid when selecting a small business loan?
Common mistakes when selecting a small business loan include:
- Not reading terms thoroughly : More often than not, the borrower fails to read the loan terms and conditions thoroughly, which ultimately leads to unforeseen circumstances and friction. Being ignorant about the terms may lead to financial loss to the borrower, hence it is essential to read and understand the terms and conditions. In case the borrower has some questions, then they may reach out to the helpline number to get better clarity.
- Overborrowing or underborrowing : Overborrowing leads to wastefulness and increased interest payment, and underborrowing may not fulfill the business purpose for the borrower. Both circumstances are detrimental to the borrower’s business, hence it is imperative to understand the ideal amount and apply accordingly.
- Overlooking total costs, including fees : While availing a loan, the borrower must be aware of all the associated costs and charges to make an informed decision. This will lead to transparency, responsible borrowing, and entrepreneurs being able to fulfill the business needs.
- Not comparing multiple lenders : This is one of the biggest mistakes a borrower can make. There are many lenders, and not comparing the best deal available for you would be a missed opportunity to seal a good deal. Compare multiple lenders, do your assessment and make the right choice which suits you the best!
- Ignoring the flexibility of repayment options : Flexibility with repayment can be a boon for the borrowers. It would be smart to compare which offers the best flexibility and make an informed decision.
4. Why is selecting the right financial partner crucial for growing your business?
Selecting the right financial partner is crucial as they provide the necessary funds, offer strategic financial advice, and ensure sustainability. A supportive partner aligns with your business goals, helping you navigate challenges and maximizing growth opportunities. Also, having a solid relationship with the lenders may help you negotiate better lending terms in the longer terms and maybe a credit line which is vastly convenient for the businesses. Hence, it is imperative to find the right lending partner and create a long standing relationship with them.
5. How can miscalculating EMIs affect your business loan repayment?
Miscalculating EMIs can lead to budgeting errors, causing strain on cash flows. It can result in missed payments, attracting penalties, higher interest, and negatively impacting your credit score, jeopardizing future financing opportunities. It is important to do necessary calculations in advance to ensure that the EMIs will be in line to your expectations. There are plenty of tools available online which can be leveraged to calculate the EMI based on the loan amount, interest, and tenure more accurately.
