HOW TO CHOOSE THE RIGHT BUSINESS LOAN

For any business to thrive and grow, capital is of utmost importance. But every business faces a time when additional funds are required to boost the business growth. At these difficult phases, businesses opts for a loan. At times, the loan requests get rejected because the applicant doesn’t meet the eligibility criteria. They might think that it’s the end of the road but it’s not. In fact, lenders offer different kinds of loans depending upon specific needs. So, here’s a quick look at these different types of loans that can get your slow business up and running.    

Different Types of Business Loans

• Short Term Business Loans:

As the name suggests, these are meant for a short period. They are quickly disbursed, as they are needed to take care of your temporary needs like purchasing inventory or paying salaries. Lenders offer smaller amounts with short-term business loans that come with a tenure ranging anywhere between 3 to 18 months.

• Unsecured Business Loans:

An unsecured business loan requires no collateral and is sanctioned on the basis of the borrower’s creditworthiness including Bank statements, Business Details like ITR, Balance sheet, online business transactions. Usually, it is hard to get approvals for such loans as the element of risk for the lender is quite high and thus, they levy higher interest rate and offer a smaller amount of capital with smaller repayment period.

• Equipment/ Machinery Loans:

These loans are given to micro, small and medium enterprises for the purchase of new equipment and replacement of the defective ones. In equipment financing, the machine itself serves as collateral making it a secured loan. The loan terms are better than personal loans but in case of a default, the lender is entitled to seize the equipment.

• Working Capital Loans:

These loans cannot be used to buy assets or make investments but only to meet day-to-day functioning costs like that of buying raw materials, paying for electricity, water or clearing bills of suppliers. They are immediately financed and come with flexible repayment and interest rates. 

• Line of Credit:

It’s quite similar to how credit cards work. The lender limits the maximum amount that the borrower can withdraw. The borrower has the choice of withdrawing only a certain amount of money that he/she needs from the time to time and pay only the interest on the amount withdrawn.

• Invoice/Bill Discounting Loan:

It is a process through which a business owner borrows funds from lenders in advance and in exchange of pending payments from the customers. The borrower pays a percentage of the total payment to the lender as a fee for borrowing the money.

• Loan Against Property:

It is a loan given against the mortgage of property and is a popular form of a secured loan. Lenders hold the property as security until the loan is repaid. In case of loan default, the lender has the right to sell it to recover the unpaid dues. A bigger loan amount and tenure at a lesser interest rate offered in these loans where one can get up to 60% of the property’s market value as judged by the lender.

How to Choose the Right One?

1. Amount of finance is required:

The amount varies according to the objective. Neither borrowing less nor more is an ideal situation as you either end up paying more interest or are left looking for another loan. One must have an exact figure in mind when asking for loans. However, it is equally important to be flexible and realistic while negotiating with the leader.

2. Reason for loan:

The borrower should be clear about the objective of the loan and how he/she plans to use it for the growth of the business. Different loans have different terms and conditions. Taking an unsecured short-term loan for purchasing equipment would not be a wise choice if a separate machinery loan is available at better rates. So, decide the purpose of the loan carefully.  

3. Credit history:

Some loans are credited on good credit history while others are used by those who wish to improve it. Check your credit score and then approach the lender knowing which loan to apply for.

4. Evaluate the terms:

Different lenders offer different amounts at different terms. So, judiciously compare the interest rates, tenure, loan-processing fee, penalty on repayment, collateral, etc. before zeroing in on the lender and the type of loan.

5. Mode of credit disbursal:

Business loans generally come in two forms of disbursal - an installment loan and a line of credit. In the first, the lender expends the whole loan amount at one go while in the other, the borrower can withdraw any amount within the maximum credit limit at any time. So, choose the mode according to the need of capital whether you want a lump sum amount or in multiple smaller parts.

Business loans are quite essential for the businesses and thus, it becomes important to choose the correct type of loan. An incorrect choice may lead to defaults and loss of collateral or even worse, a long-term effect on your business. A little research goes a long way!