A Quick Guide To Finding The Right Loan For Your Business

Need capital to set up a new farming business? Or, a cash injection to keep your business afloat in these testing times? When it is not possible to raise funds, debts through business loans can come to your rescue. The beauty of buying debt from financial institutions is that you do not have to part with your equity, which is the case if you borrow from private sources, business angels and venture capitalists. However, when it comes to raising funds through business loans, small and medium scale enterprises often struggle to get a good deal. But, keep those worries aside as this quick guide will help you find the right business loan.

Do Your Due Diligence

Before seeking a business loan, you should have answers to questions like what is the purpose of seeking the loan? How much money do you need? And, what type of loan would suit you the best? Shopping for the right type of loan for a business is similar to buying any other product. You need to compare prices, interest rates, EMIs, and then choose a lender, who is willing to invest in your business model.

Here are some of the credit options that you can consider taking:

Loans from Financial Institutions

• Unsecured business loan

It is a collateral-free loan taken to meet business requirements. The loan application process is shorter as the lender does not have to evaluate the collateral and can focus on other factors such as creditworthiness. This loan is great for businesses that do not own many assets or organisations that are growing fast and need finance urgently.

• Term loan

Term loans are usually offered for a three-year flexible tenure. You can apply for the amount ranging from Rs 5 lakh to Rs 25 lakh. The funds are disbursed after evaluating your credit profile, business history, and more. You are allowed to use the funds for whichever reason you see fit in your business. Some of the common business purposes where this loan can be utilised include inventory purchase, staff salary etc.

• Line of Credit

This option is very similar to a credit card. You have a set amount of money that you can access when needed and repay over a pre-specified period. It helps businesses that are in immediate need of cash.

• Medical Equipment Loan

This type of business loan is especially for those who are into the medical profession, either directly or indirectly. This loan is available to hospital owners, testing lab owners, individual medical practitioners etc. You can use the money to buy medical equipment like an X-ray machine, a dialysis machine, a Color Doppler and more.

• Working Capital Loan

Working capital loans are designed to cover a company's day-to-day expenses. It covers expenses such as account payable, inventory purchases, raw materials purchases, and so on. You can acquire funding up to Rs 5 crore or an LTV of 80% based on the value of your underlying business assets.

Government Schemes

• Pradhan Mantri Mudra Yojana

Under this scheme, you can avail three types of loans with coverage mentioned below:

Shishu: Rs 50, 000
Kishore: Rs 50,000 to Rs 5 lakh
Tarun: Rs 5 lakh to Rs 10 lakh

• Credit Guarantee Scheme

Under the CGTMSE scheme, new as well as existing medium and small size businesses can avail enhanced credit delivery system with maximum credit coverage of up to Rs 200 lakh.

• MSME business loans for start-ups in 59 minutes

If you are tired of the hassles involved in doing rounds to the nearest branch of a traditional financial institution, this initiative ensures that businesses get an in-principle approval letter in less than an hour, or say 59 minutes. Currently, the range of business loans falls between Rs 1 lakh to Rs 5 crore.
 
Also Read: Check Your Business Loan Eligibility 

Following These Quick Tips Can Help You Get the Desired Loan

• Have a Sound Business Plan in Place

It is important to have a meticulous business plan in place to convince the lenders to finance your business. Apart from including standard information such as a management overview, financial projections that are realistic, and market analysis, make sure to include other socio-economic factors that will impact your business. For instance, you can mention how in the wake of the recent pandemic, your business has evolved to survive in the changing landscape.

• Cash Flow Management

Higher liquidity will improve your odds of improving eligibility for the desired loan. Having a healthy debt service coverage ratio of at least one will help.

• Business Profitability

Ascertain if your company is profitable enough from a lender perspective to quickly approve a loan for business. Having sufficient revenue and profit provides the lender with the idea that even after paying all essential expenses such as staff salaries, utility bills, and inventory purchases, you will still have enough money to meet your loan EMI.

• Existing Business Debts

Business debts can be raised either in a traditional form or through a non-conventional manner such as a loan from big corporates or money lenders. Both of these debts are company liabilities that must be paid back over time. Lenders are hesitant to lend to those who have multiple debts. Thus, try to keep your debt-to-revenue ratio below 50% to get the desired business loan amount.

• Business Collateral

Business loans are unsecured loans. But, collateral can occasionally work miracles. Sometimes the lender rejects your loan application because of your average credit profile or because you do not match the entire lender's qualifying criteria. In such a case, if you use your business assets as collateral, then even if you default on the loan, the lender funds are protected. As a result, they might approve you for a large business loan for women.

• Documents

Missing documents can prove to be a major nuisance when seeking unsecured loans. Make sure you have KYC and other relevant documents in place.

• Credit Score

Take immediate steps to improve your credit score to boost your prospects of getting a better financing opportunity.

Also Read: A Guide to Working Capital Loans for Your Business

To Sum Up

As a prospective borrower, remember to do some research about your financials before applying for a loan. The right lender will offer affordable rates and flexibility in terms of repayment. In addition, you will also have a reasonable room to repay the principal as well as the interest amount.
 
Disclaimer: This post was first published on 9 September 2020 and has been updated for the latest information, freshness, and accuracy.