Finding the right business loan lender to avail a small business loan can be very confusing. It may sound easy to avail funds from Venture Capitalists, fund the business from savings, or to borrow from friends and family. However, these are not the ideal options as they bring in a lot of disadvantages with them.
Business loans can be called the best option for availing funds for small business as they bring a lot of advantages with them. First, they are easy to avail and second, n numbers of lenders in India offer them.
In a nutshell, a small business owner can avail business loans from banks and NBFCs. However, a recent study has revealed that availing funds from a traditional lender is somewhat difficult as compared to the new age lenders – NBFCs and online lenders. Nevertheless, it is vital to know the available options in the market so that you can avail the loan perfectly tailored specially for your needs and requirements.
The following are the best types of business loans that you can look forward to avail:
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Working Capital Loans
A type of short-term business loans, working capital loans are designed to bring in extra funds into the business to invest in day-to-day operations, handing various expenses, buying inventory and raw material, or for renovations. The loan also covers handing debt or dealing with emergency expenses.
Conditions to Avail: to avail a working capital loan, the business owner needs to have an excellent personal credit history. There is a need for paperwork, as well. However, NBFCs require minimal documentation to process the application for the loan. Also, they process the application and disburse the amount within a week.
Benefits: working capital loans are extremely useful as they help meet the requirements for everyday operations. They are offered at very competitive interest rates- it majorly depends on your creditworthiness.
How to apply: to apply for a working capital loan, you need to first zero in on the loan lender. Decide if you want to avail a loan from a bank or NBFC. You are suggested to avail from an NBFC as they have lenient eligibility criteria and fast processing. NBFCs offer the best chances of getting the application approved. NBFCs only check the business vintage, revenue, and turnover to approve the loan application.
SBA Loans – Small Business Administration Loans
SBA loans are essentially government-backed business loans which are availed from private lenders. The loans are secured in nature, and you need to offer your personal assets as collateral. These loans are government loan schemes, such as CGTMSE, MUDRA loan, and stand-up India scheme.
Benefits: depending on the needs, SBA loans have different benefits. For example, they can be used to purchase land or buildings, purchase equipment/machinery, cover new office construction charges, or expand the business. These loans can also be used as working capital loans, purchase inventory, pay suppliers, and buy machinery/equipment. SBA loans can be short-term loans and long-term loans as well, as per your need.
Conditions: there are several conditions which refrain you to avail an SBA loan, such as partial ownership of the business, repay unpaid taxes, or for activities not related to business. The terms and conditions vary depending on the amount availed, the plan on how to use the funds, and your needs as an owner. The maximum term for which the loan can be availed is six years, and the interest is charged between 8 and 13 per cent.
How to apply: all types of SBA loans have different eligibility criteria and application process. You can visit the government loan site to apply for the business loan online.
Accounts Receivable Factoring
Also known as receivable financing, this type of business loan converts the sales on credit into immediate cash flow. Simply, if you have some existing and outstanding invoices, you can give the same to a third party for an outstanding payment. This type of business financing is generally used to pay for small business for a short term while you look for more sustainable and long-term ways of business financing.
Conditions: the accounts receivable factoring can be costly at times and that it may exhaust all other types of business financing before availing them. Once you avail this option, the interest rate may range between 10 and 25%, plus other charges which may lead you to pay much more. Also, this type of financing is determined by the strength of the customers and not you – as a seller of products or services. Most invoices which are older than 900 days are not financed under this option, and those finances which are paid quicker will offer excellent benefits.
Benefits: one of the most significant advantages of accounts receivable is that it offers immediate cash on future sales. Also, you can outsource your accounts receivable to another organisation – it will free up your focus, and you can be more productive. A quick financing option, this financing doesn’t require a business plan or tax statements.
How to Apply: commercial lenders generally offer the accounts receivable financing. To apply for this, you will first have to fill the application form and provide some documents, such as articles of incorporation, recent accounts receivable and payable reports, etc.
Family & Friends
Well, all are familiar with this option of borrowing. But there may be some things that you may not know and surprise you. First, when you avail a loan for business, it is always a good practice to put everything in writing – the loan amount, interest rate, and repayment plan. Otherwise, some misunderstandings may happen, which can lead to bad blood in relationships.
Conditions: borrowing from loved ones comes with the risk of misunderstanding. The reality is not every friend or family person has extra money to lend to your business. And in case they do have, they may not want to risk their extra money to something that they don’t have control to. So, it is imperative to communicate well with friends and family and ask them if they want to participate in the business.
You can initiate the process by providing your relatives with a promissory note that states the amount that you require and what interest rate you will be offering. You can specify by the repayment tenure as well.
Benefits: This type of borrowing comes with the lowest interest rate and the best-customised repayment tenure. Plus, when some are personally and financially invested in your business, they would do anything to help you succeed and fulfil your objectives.
How to Apply: to show seriousness to your relatives, approach family and friends with a business plan, projections, etc.