Smart Uses of Small Business Loans

As per World Bank’s Ease of Doing Business Index 2016, India is not a country where you could get credit easily. This is especially true if you are a small business owner. Most small business owners face bottlenecks in securing financing for their businesses. So it makes sense to use whatever loans or financing you get in a smart and efficient manner..

A few smart ways to use your small business loan are:

1. Purchasing Inventory: It becomes necessary to have minimum inventory levels termed as the safety stock to ensure continuity of supply. The quantity and quality of your inventory impacts the manufacturing of your products and your supply to the market. If people don’t find it, they won’t buy it. This is where your loan could help buy the necessary inventory in order to meet higher demand and prevent stock outs.

2. Purchasing Machinery and Equipment: Whether you are a manufacturing company or a product development company, the need for good machines and equipment always pops up from time to time. Having the right machines is critical as they directly impact production quantity, quality and related products or services.. In such situations, a business loan might be helpful in financing purchases that are beyond the scope of your credit card.

3. Day-to-day Expenses: Also known as operational expenses, a small business often needs finance to fund its non-manufacturing expenses and carrying out day-to-day activities like employee benefits, transportation, travel, rent, repairs, taxes, and more. Sometimes, a business loan comes in handy to fund these daily financial requirements and keep the business running.

4. Fresh Talent: Business often needs an infusion of talent from time to time, and investment in talent is sometimes quite costly. Though such investments tend to bring in money over time, the immediate cost of such investments may strain the current cash flow situation.

5. Expanding Business: Whether you are moving in to a newer or bigger location, or investing in a new product line, or investing in more workforce, expansion always means money. It could also mean expanding your online sales campaign, or marketing or advertising budgets. The immediate cost of expansion can always be met with a small business loan.

6. Project and Acquisition: As a business grows, mergers and acquisitions are bound to happen for many firms, requiring significant investment and funding – something that a business loan can help assist with.

Various Types of Loans Available for Small Businesses:

1. Invoice/ Bill Discounting: This is an easy way of getting finance and turns to be a win-win situation for both sellers and buyers. It works as a Bill of Exchange, which is often termed as negotiable. In these situations , the bill generated is sent to the company before the payment due date at a value lesser than the invoice amount, this difference is dependent upon the duration of the credit period.

2. Working Capital Loans: This is the best loan type for financing short term operational needs of a company as it is disbursed relatively quickly. These work as corporate debt borrowings for companies that don’t have sufficient funds and assets in hand for their daily operations like paying salaries and other demands. These are flexible with multiple repayment and competitive interest rates.

3. Secured Term Loans: It is a loan type in which the borrower mortgages his assets i.e. a car, machinery, or real estate asset against which the loan is sanctioned.

4. Loans Against Property: These are loans given to small, medium, and Large Enterprises by mortgaging their commercial or residential property with flexible repayment time & interest rates.  These loans are usually given at 50-60 % of the properties  market value.

5. Machinery Loans: These loans are given for the purchase of machinery and equipment in micro, small, and medium enterprises usually for up to 60 months. They help in purchase of new machinery for upgrading or expanding an existing facility.

6. Medical Equipment Financing: These loans are used for purchasing standard medical equipment such as CT Scanners, Sonography machines, Colour Doppler, MRI machines, X-Ray machines. Such financing helps Medical Establishments to grow and expand their operations.

Eligibility and documentation

Any NBFC, Bank or Financial Institution is very cautious before approving any loan. They usually assess several items, but the most commonly assessed aspects are:

a. The person should have a good credit score. So, it's better to clear your dues prior to applying for loan.

b. Have clarity about the amount of loan you need and a convincing plan about how you will repay. Also present a good marketing strategy about how the company will make benefits.

c. Carry all your balance sheet reports from last three years and profiles and KYC of directors and partners in the company.

d. Don't forget to carry all the documents related to licensing and registration certificates.

Financing is critical to the health and growth of a business, it is the life blood of any organisation. Therefore, it makes sense to have a judicious mix of both Debt and Equity to ensure the smooth running of any commercial establishment.