Monday, 18 December 2017

A Basic Guide for taking a Business Loan

Just like the dream of buying your own house or seeking higher education can be fulfilled with the help of a loan, a business can be expanded or set up with the right kind of loan. Business loans can be sought for setting up a new business venture, for fulfilling short term or long term capital requirements or for business expansion. The applicant can choose to take a business loan from one of the many financial institutions or banks depending on his/her requirements and the terms and conditions set by the lender.
Purpose of Business Loans:
As we said business loans can be taken for various purposes depending on the needs of the borrower. Here are a few purposes for which a business loan could be utilized:
Ø  Expansion Plans: Any business would like to expand their operations if they are already doing well. If they find themselves unable to do so due to lack of funds then business loans offer the perfect solution.
Ø  Working Capital Requirements: These loans can also be of great use for fulfilling your requirements for day to day funds or the funds you may require for a longer period to run the business operations.
Ø  Buying/Maintaining/Upgrading Machinery or Equipment: Depending on the nature of business there may be a need to buy machinery or equipment, upgrade it or repair and maintain it. Not doing so could hamper the business operations; this is where business loans step in and can be used to keep your business running smoothly.
Ø  Infrastructure Requirements: Proper infrastructure is a basic requirement for any business entity and business loans can be used to get the right type of infrastructure in place.
Eligibility Criteria:
All lenders have eligibility criteria in place for giving out any loan in order to ensure that they choose the right candidates who will pay on time and will not default on the loans. Here a few pointers about the eligibility criteria that the borrower should keep in mind:
Ø  Check the eligibility criteria before applying for a loan as the application may be rejected if one does not meet the criteria that is laid down by the lender.
Ø  It is important that one checks their CIBIL Score before applying for a loan as a low credit rating could lead to the loan application being rejected.
Ø  The eligibility criteria may differ from lender to lender and may also vary as per the business that is seeking the loan.
Ø  For business loans apart from the usual documents like address and identity proof (KYC documents) the lenders will also ask for financial statements like the Profit and Loss Account, Balance Sheet and proof for existence of business, business plans for current and future deployment of funds.
Interest Rate is Important:
When deciding where to borrow from, an aspect that most borrowers focus on is the interest rate. The interest at which a business loan is procured will directly impact the profitability of the venture. Thus if the rate is too high, rather than contributing to the growth it may cause your overall cost to go up and thereby lower the profit or make it even negative.
Thus it is important not only to compare between business loans offered by various lenders but to also consider alternatives sources of finance. Here it is important to keep in mind if one has a good credit health it could help them get a loan at a competitive interest rates; getting a loan for low CIBIL Score could prove to be detrimental for overall business profitability.
If the credit health is not good or business loans are available at very steep rates then one should consider getting a loan against deposits/property/gold should be considered depending on how much the borrower requires and how favorable the terms and conditions for these loans are. 
Apart from the interest rate, the applicant must also focus on the processing fee and other costs before choosing the lender or type of loan as they also contribute to the cost of borrowing.

So use the power of business loans to expand your venture or set up a new one!

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