Have you now finally decided to start your own business? If yes, then you would also know what all it takes to start a business. Hard work and passion are not just enough. You need finances as well to support business operations. You can start the business through your savings or borrowings from friends and relatives. However, with time, the funds would dry up, and you would need to look for additional sources for the same. This is the time when you decide to avail a business loan from a bank, NBFC, or any other financial lender.
Let us now first take a look at what a business loan is.
What is a Business Loan?
Business loans are financial assistance from banks and lending institutions in India. The main objective of the support is to meet all the urgent needs of a growing small business. Most lending options cater to all the financial needs of a business by offering different loans, such as Flexi loans, term loans, capital loans, working capital loans, and machinery loans. All types of businesses in India, such as privately held companies, sole proprietorship, partnership firms, retailers, and self-employed individuals, can avail business loans.
Why are Business Loans attractive for Start-ups?
Businesses, during their early years, need to cope up with a lot of difficulties. They need to make a name in the market, compete with their competitors, and also prove its credibility. For most of these activities, there is a need for funds. Significantly, these start-ups also face difficulty in generating enough revenue in the starting to sponsor expansion plans or machinery purchase. This is where a business loan becomes very helpful for them.
However, a point to notice here is that the small business owners are often not able to pledge security or collateral to avail of a small business loan. Thus, the availability of unsecured business loans makes it easy for them to get access to funds. Another attractive feature of business loans without security is that they come at basic eligibility criteria and minimal documentation.
For a start-up company, it is better to approach an NBFC rather that a bank as banks generally don’t offer unsecured loans. On the other hand, NBFCs do offer unsecured business loans to businesses with a minimum vintage of two years.
Business Loan Features
The business loan interest rate remains fixed throughout the loan tenure. However, depending on your profile and creditworthiness, the lender may offer a low or high-interest rate. Typically, the flat interest rates vary between 11 and 19%.
The business loan amount depends on the profile of the borrower. In essence, if a business owner has a turnover of 10 lakhs annually, he would be offered a business loan up to Rs 5 lakh. A point worth mentioning here is that credit history and reports play a vital role. If the credit score is not above 600, the loan application would be either rejected or approved at a higher interest rate.
Now, if you are wondering if it is possible to avail a business loan if you have a bad credit rating, then the answer is yes. The only point is that you will either have to offer collateral or get the loan at a very high-interest rate. The lending institutions offering these types of loans will first check if the business revenue, assets, etc. are more valuable than the loan amount they are offering. If yes, they will approve the application.
The loan repayment tenure is usually between 6 months to 20 years, depending on the borrower’s repayment ability. The start-up business loans are hassle-free as well.
Also Read: Business Loan Feature & Benefits
How is Business Loan Beneficial?
Expansion to a New Place
Are your employees more than the number of cubicles or workstations in your office? Have you outgrown your present office location? Or maybe you run a restaurant where you get more customers than what can fit inside your office space. Or you get a lot of customers in a retail store?
Well, the great news is that your business is growing and catering to a broader audience. Now you need to move out to a bigger place to accommodate your employees or customers. It’s the time for expansion!
Well, just because your business is growing and ready for expansion, does that mean you have enough money to finance the same?
In this situation, you may require to avail a loan to finance your move. Whether the requirement is to move to a new location or meet the overhead cost, the business loan amount will play a significant role.
But before you commit to a lending company, project the change in revenue and determine if the new revenue would be sufficient as per the increased outflow of cash (as a result of monthly EMI). Would you still be making profits and cover the cost? Forecast the revenue and see its impact. If you are planning to open an additional retail store at a new location, research the area and make sure that you have your target market there.
Building Credit Score for the Future
If you plan to apply for a larger-scale business loan in the future, say in the next few years, you can avail a small business loan now to build a positive credit score. So, you can start with a small and short-term loan to build a good credit score for your business.
Businesses can really face hardship in qualifying for larger loans if there is no strong and positive credit report and score. Availing a small loan and paying all EMIs on time will build a good score for the future.
This strategy can also help build a strong relationship with the loan lender. You will build a strong connection where you can turn back to the lender when you require a bigger loan. However, you are advised not to avail of a small loan if you can’t afford it. You need to be careful here. Else you will end up hurting your score. Even a single late payment can jeopardize your entire effort and reduce the chances of getting the application approved in the future. So, if you can’t afford it, it is better that you don’t apply on the first hand.
Need to Buy Machinery/Equipment
Purchasing new and updated machinery or equipment can undoubtedly improve business efficiency. It is no brainer. But, you need to buy machinery, IT equipment, and tools to manufacture your products. But machinery and tools don’t come in hundreds. They require a high investment. So, a machinery loan can be beneficial here. Besides, there is no need to offer collateral as the machinery itself serves as collateral.
But before you decide to avail of a machinery loan, make sure you are availing it for a piece machine that is going to boost your sales and, thus, generate more revenue. Let’s suppose you may want to buy a tea or coffee machine for your employees. But it is not going to add to your revenue. So, if you want to buy the same, either ensure your present business revenue would be able to repay the monthly EMI or simply not avail it.
Purchase & Increase Inventory
Inventory makes for one of the biggest expenses of a business – it is similar to machinery expenses. You need to keep up with the demand by always having enough inventory with high-quality options. This can be difficult if you need to buy large numbers of inventory. Since inventory offers ROI, buying inventory is more or less like an investment.
However, if you have a seasonal business, you may face difficulty while buying inventory without any cash in hand. So, you can avail a loan to purchase inventory and raw material.
However, to ensure that you avail a loan for it would be a wise decision or not, you need to create a sales projection. In the same, you need to record past years’ sales figures during the same season. Next, calculate the debt cost and compare it to the projected sales figures. If you would generate more revenue than the loan cost, availing a loan is a wise decision. You are still advised that the sales figures vary every year. So, you need to be conservative and consider the figures for multiple years.
Business Opportunity that Outweighs the Potential Debt
Every now or then, a good opportunity falls into your lap. But, you must judge whether to let the opportunity pass up or you need to encash on it. Maybe you got a chance to order inventory in bulk at a great discount, or you got a chance to expand your retail space. In these situations, you need to determine the return on investment and weigh it against the cost at which you will get a loan. This way, you can judge if it is a good opportunity or not.
For example, let’s say that you run a business where you have got a commercial contract for Rs. 10,00,000. The problem here is that you don’t have the equipment to complete the order on time. You can avail a loan to buy machinery worth Rs 5,00,000. If you avail a loan for two years, it costs you Rs 6,22,538. So, you will still get a profit of around Rs 3,75,000. Plus, the machine will be yours for a lifetime.
In this situation, since the potential returns outweigh the debt, you must go for it. However, you are suggested to be careful with the calculations. You must neither underestimate the true costs nor overestimate them.
Hire Fresh Talent
When running a business, you need to wear a number of hats. But you need to know that you can’t master everything. There is a number of tasks, such as bookkeeping, marketing, fundraising, and customer service. If a small team is performing all of these tasks alone, you may compromise on your business model.
So, you need to invest in hiring talent as well. In essence, it is one of the best ways of keeping the business competitive and innovative. This is a great move. You can outsource the hiring process and, if need funds, avail a business loan for it. In the end, an employee is the one who will help you generate business.
In the end, one can conclude that a business loan is extremely advantageous if used in the right direction. So, if you wish to avail a loan for business, you need to invest it in the process that is going to generate more revenue.