Running a small business is expensive. Irrespective of whether you’re in the startup phase or growth stage, a small business loan can help you address funding needs. A business loan can help you purchase new equipment, pay for inventory, expand your business to acquire new customers and markets, or meet any other business needs.
The good news here is that small business loans are aplenty today, thanks to the rise of digital lenders and NBFCs. From equipment loans to term loans, invoice financing to merchant cash advances, small business owners have multiple loans options to choose from. The biggest challenge today is not securing business funding, but choosing the right one. Here are some tips to consider from CreditMantri, India’s credit experts, and trusted loan aggregator platforms while selecting the right small business loan.
Things to Keep in Mind, before Choosing a Small Business Loan
#1: Credit History of the Business
Irrespective of whether you apply for a small business loan at a bank, NBFC or digital lender, the primary criteria for business loan eligibility are the credit score and history. The importance of a high credit score for your business cannot be stressed enough.
Your business credit score is a representation of how your business handles credit. The credit history and credit score are based on previous loan repayment records, overall debts you owe, type of debts and more. Having a high credit score demonstrates to prospective lenders that you have a stellar repayment history, thereby boosting your loan approval chances. Not just loan sanction, but a good business credit score can significantly reduce overall loan burden by securing the best interest rates on your loan.
If you’re not sure of your credit score, you can quickly check your business credit score at CreditMantri. CreditMantri also offers you a detailed business credit report analysis helping you identify where you’re going wrong.
Another point to be noted here is that when it comes to small business loans, most lenders do not distinguish between the borrower and the business. Besides evaluating the credit score of your business, lenders are likely to assess your personal credit score as well. To an extent, your personal credit score also plays a role in determining business loan sanction and interest rates. So, it pays to work on improving your personal credit score as well.
#2: Years of Business Operation
While the credit score is a critical criterion in determining business loan sanctions, it’s not the only one. Other factors, like the number of years of business operation, also play a huge role in determining business loan eligibility.
Generally, lenders sanction small business loans to businesses that have been in operation for a specific number of years. The reason for this is – to avoid taking on risky borrowers. Established companies are more adept in handling credits and have an adequate cash flow to ensure timely repayment of the loan compared with new and upcoming businesses.
Does that mean new businesses can’t get a small business loan?
Well no! If you’re a new small business, you can apply for startup loans that don’t have years of operation as an eligibility factor. Make sure to check the years of operation eligibility to avoid getting your loan application rejected.
#3: Quantum of Business Loan
Consider this scenario: Business A is a small business with an annual turnover of Rs. 2 lakhs. The company applies for a business loan for Rs. 50 lakhs with a repayment tenure of 2 years. What do you think will happen? The loan application is likely to be turned down since the quantum of the loan (loan amount) is disproportional to the turnover of the business.
As you can see, the quantum of loan plays a crucial role in determining whether the loan will be sanctioned or not. Small businesses that request loans much larger than their annual turnover are likely to be turned down.
Ensure that the quantum of loan is in line with the nature and repayment capability of your business.
The reverse is true, as well. Just because your small business qualifies for a higher loan amount, it doesn’t mean you have to apply for it. Let’s say, your business is eligible for a term loan of Rs. 10 lakhs, but your current fund requirement is only Rs. 3 lakhs. It’s always sensible to apply for loans only for what you need and not what you’re eligible for. A higher loan amount means you have to pay back more, not to forget the interests as well.
So, make sure to assess your needs carefully and borrow only what you need.
#4: Type of Business Loan
A business loan is a broad term that refers to a different variety of credit options. There are dozens of credit options for small businesses in India, categorised based on the nature of the loan, usage, and tenure.
Some of the popular types of small business loans in India include:
- Traditional term loans
- Startup loans
- Working capital loans
- Equipment financing
- Loans against a property for SMEs
- Line of credit, overdrafts
- Invoice discounting
- Merchant cash advance
- Business credit cards
- Business loan for women
- Pradhan Mantri Mudra Yojana, etc.
The type of business loan that best suits your business depends on various factors like how much loan amount you need, eligibility criteria, end usage, etc. Ensure the different types of small business and choose the right one that best fits your needs.
#5: Tenure of the Loan
As mentioned above, small business loans are of different types. A term loan, loan against property or equipment loan are ideal for long-term funding needs, while invoice discounting, overdrafts and MUDRA loans are best suited to meet short to medium-term business needs.
While choosing a small business loan, make sure to carefully evaluate your business’s repayment capacity to decide the tenure. In simple terms, going for a long tenure reduces monthly EMI burdens but increases the overall loan cost. On the other hand, a short tenure leads to higher EMIs but reduces the overall interest paid. So, make sure to consider the cash flow of your business to choose the right EMI. You can also make use of a business loan EMI calculator to help you decide the right tenure.
#6: Clarity of Loan Usage
Most lenders require businesses to provide a detailed business plan while applying for a business loan. The business plan is like a blueprint – it lists the reasons you need the loan, how you plan to use the loan amount and how you will generate revenue to repay the borrowed amount.
The business plan helps prospective lenders evaluate the risk of lending. Having a clear and detailed business plan works in your favour, as it demonstrates that you have put thought into the loan and have a solid plan on how to repay the borrowed amount. It boosts the lender’s confidence making it easier to secure loans.
#7: Existing Relationship with the Lender
It’s one of the most overlooked factors when applying for a loan. Your small business loan is more likely to be approved if you have a previous relationship with the lender. For example, let’s say that you hold a current account at a specific bank and have availed an overdraft on it, which you have repaid on time.
This works in your favour as the lender knows that you’re diligent with loan repayments. Apart from enjoying quick loan sanctions, you can also enjoy other benefits like a higher loan amount, lower interest rates, etc.
While choosing lenders for small business loans, it’s always a good idea to check with your long-time banking partner first. This gives you leverage in negotiating lower interest rates, larger loan payouts, and flexible repayment tenures.
#8: Research and Compare Loan Offers
There’s a funny analogy in business circles that – a small business loan is like a bus. If you come across one offer, you can be sure that several will follow. So, make sure to do your research, compare the offers available and choose the best one.
Very often, most businesses automatically take a loan with their current bank. While this is a good starting point, note that you’re likely to find a better offer if you compare all the options available. Make use of a trusted loan aggregator like CreditMantri to compare and choose the best lender, who specialises in loans suited for your business needs.
Finally, Don’t Forget to Read the Fine Print
In the excitement to secure a small business loan, most business owners fail to scrutinise the loans’ terms and conditions carefully. This could prove costly, as it can trap them in a costly loan with steep prepayment charges and other unfavourable terms. Make sure to read the loan terms several times and get all your doubts clarified with the lender, before closing the deal.
Small business loans can backfire if not carefully planned. So, it’s crucial that you take the right loan or you could end up struggling to repay the debt. If you’re looking for the best small business loans in the market, check out CreditMantri. CreditMantri lists out the best business loan offers for you and can guide you through the loan application process, every step of the way.
So, what are you waiting for? Make use of the best small business loan offers, and take your business to the next level.