Every business is unique and have different requirements. An old proverb says – Spend Money to Earn Money. To grow and maintain the flow of recurring expenses, working capital of the business, buy new assets or inventories to the company, advertisement or to buy real estate and expand operations investment is needed. Finance management is most crucial aspect of any business. To manage all new additional cost with the running expenses is very difficult. Paying upfront for the business needs is difficult until the business shows the growth in near future. Its a circular problem where you can’t grow unless you invest. But is it easy to invest in the business along with the present operational cost?
An easy and safe solution is to avail a small business loan. It helps to balance the financial changes of the business that can result in higher returns over the investments. Banking sector or the network of Non Banking Financial Companies (NBFC’s) is the best source to get the required funds from all the other available sources. The agreed terms and conditions decides the interest rates will either be fixed or floating. To provide a business loan customer profiles are categorized as follows:
This segment includes the Proprietorship, Partnership, Limited / Private Limited, Limited Liability Partnership firms
Self Employed Professionals
This segment consists of Professional practitioners like CA’s, Doctors, Architects, Company Secretaries etc. (Proof of qualification has to be served as a document)
Self Employed Non Professionals
Traders, Manufacturers, service providers, retailers etc fall into this category.
Along with the above categorization education, experience, expertise is considered as an eligibility factor. Lenders generally give weight-age to the entrepreneurs who have good experience and expertise in their business for which they have requested a loan. Certain other factors that decide the eligibility for the business loan are:
Age: An applicant should be aged between 21 years and 65 years
Income: Business should be in a profit making situation for atleast last 3 years
Turnover: The current business should show a growing turnover with a minimum amount of 25 Lacs
Co-applicants: Though it is not mandatory for the applicant to opt for a co-applicant but yes it increases the chances of being eligible for the business loan.
Interest Rates: Interest rates for the business loan are based on various factors such as the cost of fund, tenure, applicant’s credential’s and market situation. An applicant has to be careful and choose wisely from the options available in the market. Bank will also consider and judge the viability of the business to bear all the recurring fixed costs i.e the monthly installments of previous existing loan and the new upcoming expenses of the new loan along with the operational cost of the business.
Security: With the agreed terms and conditions a business loan is completely an unsecured loan where a customer doesn’t need any collateral security to be offered for taking a business loan.
Flexible Repayment: A loan repayment can be customized as per the convenience of the consumer. A consumer can choose a repayment plan that can be adjusted with the cash flow. These plans can be:
Step-up : in this plan, one can easily increase the fixed monthly EMI’s to meet the profit increment.
Step-down : this plan offers to lower the EMI’s gradually. As the business starts making more profit, loan amount can be repaid on a faster pace.
Bullet Plan : with this plan the loan amount can be paid periodically to lower the EMI or to close the loan amount at an earlier stage. (Know more which factor effect your loan EMI)
Negative Factors that Effect the Business Loan
Credit Rating: Credit worthiness of an applicant is evaluated before processing for the application. Higher credit score leads towards the higher chances of getting the loan with flexible terms and conditions. Defaults in payments or any huge outstanding loan amount can negatively impact on the potential. Bank can reject an application due to poor rating unless the applicant is ready to pay high interest rates. (Know more about credit score & how to improve your poor rating)
Business Instability: its an important aspect for the business loan consideration. If the income is not stable with the growing years and the profit is on the margin level. The lender can demand a collateral for the approval if the balance sheets of business are not strong and in growing phase. It is important to apply for a business loan only when the business is able to meet all the required eligibility criteria.
Promoter’s Reputation: Banks/ NBFC’s only lends to an applicant who is capable and willing to repay the loan amount and has a clean and clear image in the eyes of law. One should be blemish free in terms of loan repayment also.
Every Bank/ NBFC have different criteria to calculate the eligibility according to the type of the borrower, age of an applicant, location of the business etc. Mudra Homes helps and guides in finding a right lender as per the requirement along with the required list of documents needed. The variety of options are provided by filling few details to find the eligibility and the choice is left to the business owner. (Need to know the difference between Bank/NBFC)