Want to take a business loan? Follow these…

A Business loan? Where? When? How? 

Rasila runs a catering business and had to cancel her orders twice when she could not manage her finances. Ali is looking to open another café near a tech park but does not know how to get a loan for expansion. Finance is the lifeline of any business and business loan, one of the ways.

As the rules for business loans differs from that of  a personal loan, we bring to you some principal pointers one should know before taking a business loan.

A good business plan

Personal loans may be used for purpose of your choice, it does not work that way for business loans. It is important that a business plan is in place before you approach a financial institution for a loan. The business plan should spell out in clear terms, your business goals, revenue and cost projections. A sound business plan is an indication of a sound business.

Keep your financial documents ready

Financial statements like the Profit and Loss Statements, Balance sheets, Cash flow statements etc of the previous years are essential. It shows financial health of a business. Any lender would like to give you a loan only if the business is in good financial health and shows a potential to grow. It would be good to draw up a budget and present with the financial documents.

Reason for taking a loan

Once your documents are in place, you need to have a solid reason for taking this business loan. Forbes says there are good and bad reasons for taking a loan. While buying a piece of equipment, development of a business unit could classify as good reasons, something like repaying interest on another loan, buying noncore assets might sound as bad reasons. A lender needs to be convinced of your reason.

Credit history

Business can exist in different forms. It may be a sole proprietorship, limited liability partnership, a registered company etc. Lenders not only look for the credit history of the corporate entity but also check for credit history of the people in principal positions of the entity, especially when it is a sole proprietorship or partnership. So it pays to build up your credit history before applying for a loan.

Make arrangements for collateral

Every lender looks at getting his/her money back and earn some interest on the amount lent.  So a collateral acts as a safety net for the lender. Different loans will have different criteria for collateral. Know the requirements beforehand and make arrangements to provide for collateral/security, if required.

Study the terms of the loan

Business loans can come in different forms and each has their own terms and conditions as regards to repayment, the rate of interest etc.  Although your need for finance may be immediate, take the time to go through the terms in detail before you accept the loan. Make sure you pay attention to the repayment schedule, processing fees, the interest rate charged etc.

Approach the right lender

Relationships matter in banking. But at the same time, approach the right lender for your loan. For Ex: You may be banking with a mainstream bank but not have good credit score. At that time it may help approaching a smaller bank/NBFC who would be ready to lend in spite of the lower credit score. Some lenders might be inflexible regarding terms. So choosing the right lender makes your job much easier.

Do you have any better ways of availing business loans? Please share with us.