Whether it is running a successful enterprise or aspiring to start a new business venture, you know that sufficient cash flow is the key to keeping your business alive and achieving your business goals. This is where a business loan comes in handy.
Many banks offer different kinds of business loans, allowing you to get the funds you need easily and keep the business running. It is important to choose the right business loan that can help bridge your cash flow gaps. You can take a loan for expansion, purchasing of inventory, or to meet any other business needs
Since borrowing is a big financial commitment, you must be aware of the important factors to consider before taking credit. This blog discusses these factors to help you make an informed borrowing decision.
Before you approach a bank and apply for a Business Loan, you must take a step back and evaluate your financial needs and business objectives. Do you want the funds to expand your business operations or to purchase new equipment or to manage cash flows?
By having a clear idea of your business’s current financial standing and growth plans for the future, you can determine the exact amount of money you require and the type of loan that best suits your needs, making your borrowing process smooth.
As a business owner, you may have access to different types of business loans, each with its features and benefits, from traditional term loans to lines of credit and government-sponsored monetary schemes.
You must understand the difference between these options in terms of how they work and how they align with your requirements. You must also be aware of the business loan interest rate, repayment terms, eligibility criteria, etc. to make the right choice.
- Understand the costs involved
While evaluating the different types of business loans, you must pay close attention to the costs involved. Generally, these costs include interest rates, processing fees, prepayment charges, etc.
When you take out a business loan from a bank, they charge interest on the amount you borrow. This is the cost you pay them for the funds allowed. When you repay the amount, your EMI includes both the principal and the interest amount.
Since you have to repay the interest throughout the loan tenure or until you repay the full amount, you must choose the lender that offers the loan at the best interest rate so that the EMI is affordable. Additionally, you must consider the charges involved, which will affect your overall borrowing cost.
A credit score is one of the most critical factors that banks consider while evaluating your eligibility for a loan. Different credit bureaus like CIBIL assign credit scores based on your credit transactions. The score assigned by CIBIL is called the CIBIL score.
A three-digit number ranging from 300 to 900 reflects your personal and business credit history. For MSME Units, CIBIL MSME RANK (CMR) is also used by many banks to determine the onboarding criteria.
So, before you approach any bank for a business loan, you must check their minimum credit score requirement and see if it matches your credit score. Your credit score plays a significant role in loan approval and the interest rate you'll receive. Higher scores typically lead to better terms. Check your score and take steps to improve it, if necessary.
A business loan generally involves a large sum of money. When the bank lends you that kind of money, it surely wants to ensure that it recovers the money along with the interest. So, for this purpose, it may ask you to offer collateral against the amount you borrow.
It acts as a security cover for the bank to recover their money if you fail to repay it. You can provide any asset, such as real estate, business inventory, machinery, receivables, etc. as per the type of security based on the loan requirement.
It is advisable to choose a bank that has a simple application, minimal documents to process the loan and digital documentation to make the process simpler and easier. Lenders want a solid business plan outlining your strategy, market analysis, and financial projections. Hence, all related information should be ready at the time of application. User credentials of the GST/ Income Tax portal are also to be made ready for data fetch by banks for analysing financial indicators. Various Online platforms/websites help you understand the multiple options available in the market in the case of products, features and requirements.
Final Word
Choosing the right business loan is a critical decision that can significantly impact your enterprise's success and financial health. So, always choose a reputable bank like South Indian Bank that offers expertise and advice on the best loan option with hassle-free processing of your financial needs.
Disclaimer: The article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of The South Indian Bank Ltd. or its employees. The South Indian Bank Ltd and/or the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial/non-financial decisions based on the contents and information’s in the blog article. Please consult your financial advisor or the respective field expert before making any decisions.